Every business needs to choose a legal structure when first starting out.
No need to panic, this isn't something that will define your whole working career, and changes can be made down the line. However, for the short term, deciding on the correct structure will determine how you run your business.
What is a Sole Trader?
A sole trader is a self employed person that is solely responsible for their business. It is the simplest and most popular form of business structure in the UK. It is very easy to set up (see more info at GOV.UK).
A sole trader is responsible for keeping track of the business turnover and costs, and reporting this in a self assessment tax form. This may sound daunting, but it's relatively simple and there's a lot of helpful information online.
A sole trader is responsible for the business in its entirety, the benefits of limited liability (covered further in next section) do not apply - meaning if the business incurs debt, the sole trader will be responsible even at the loss of personal assets. However, this form of business is usually smaller and so often is not open to the same level of risks.
As a sole trader, the businesses profit is the sole traders income, and tax is paid on the full amount of profit which for the layman is:
the total amount of income minus the total costs incurred.
Partnerships
A partnership operates in a very similar way to a sole trader, but differs in that there can be multiple people owning the business. All partners will own a different percentage of the profits, it's best practice to determine this before the business starts trading and more importantly, put it in writing so that everyone involved knows explicitly what is going on.
Each partners' percentage of the profit is classified as that partner's income, and tax will be paid on this amount. Much like a sole trader, each partner will need to do a self assessment tax return and one nominated partner will do one on behalf of the business.
What is a Limited Company?
A limited company is a form of business structure that, unlike a sole trader, is separate to its owners. Even if run by just one person, a limited company has the legal distinction between the owner and the business.
The word 'limited' applies to the liability. With this form of business, the owner only risks what is in the business: personal assets are not in danger should the business incur losses.
A limited company is more difficult to set up, requires a greater amount of administration and paperwork- including more detailed accounts- for this reason it is almost generally accepted that you will need an accountant to submit your accounts.
If you're well accustomed to self assessment or accounting, It's relatively simple but if you're new to all of this it is more complicated than setting up as a sole trader.
The benefits of this type of business structure are that broadly speaking, limited companies are more tax efficient. There are a greater number of tax deductible costs & allowances, and there is less risk to you personally.
Which Should I Choose?
If you are just setting up a Window Cleaning business, deciding which type of structure can be difficult. If you find yourself stuck, head over to the business section of the gov.uk website for more information.
In our experience, most Window Cleaners get started as sole traders or partnership for simplicity's sake.
As the business grows you will become more familiar with basic book keeping and accounts.
Eventually, you may start considering hiring staff or you may go over the VAT threshold (turnover of over £90,000 annually as of April 2024). At this point there are major benefits to switching over to a limited company.
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Head to our Starting a Window Cleaning Business Hub for more helpful guides
