Company status - which one fits your ECommerce business

So you’ve decided to sell online as a business. That’s great news! There are lots of exciting things to do but, before we start, lets take a moment to celebrate your decision. Selling online may be a great way to make some extra pocket money but why stop there? If you read the introduction you will know that running an Ecommerce business has lots of advantages and if you are ready to put some work into this then I am confident that you will be successful. Remember that the whole purpose of this Guide is to make sure you can stay focused, make progress towards your goals; and ask for help when you need it.

Now one of the first decisions you need to make is about the legal status of your business. Most small businesses opt for a status of sole trader, partnership or limited company but there are other types of business status including social enterprises, community interest companies (CIC), public limited companies, limited liability partnerships, charities and more. It is always worth familiarising yourself with the definition and structure of these other options before you decide but, for the purposes of this lesson, we will be concentrating on the four most obvious options for small businesses.

1. Sole Trader: The Simple Starter

This is arguably the most straightforward way to start an Ecommerce business. All you need to do is register with HMRC as self-employed and keep records of all trading activity. You will be given a Unique Taxpayers Reference (UTR) which you will need for submitting your annual self-assessment tax return. You will then be required to pay tax (and National Insurance) if it is due.

Sole Trader is a popular choice for anyone who is just starting out and who wants to see how things progress before deciding on whether to change their company status or stay as they are. Don’t be fooled by the name though. A ‘sole trader’ need not be a ‘one person’ operation and in practice, they can grow into sizeable companies which employ staff, have VAT registration and achieve a high turnover.

Aside from simplicity, other advantages of sole trader status include minimal accounting and reporting requirements; being able to keep all of the profits from the business (after tax); and being able to keep business affairs private. On the downside, sole traders have little access to tax efficiency measures and they carry full liability for their business meaning that personal assets may be at risk should the company run into financial difficulties. This can also make sole traders less appealing to certain funders, customers, partners and other bodies.

2. Limited Company: Tax Efficiency and Protection

There are two main types of limited companies: limited by shares (most common) and limited by guarantee. You must register a Limited Company with Companies House and with HMRC after which you will receive a Unique Taxpayers Reference (UTR) for the company. Limited Companies are considered to be a separate legal entity from the owner. Whilst you are still in charge, in legal terms, you are classed as an employee (often a Director) and, if you choose, you can also have additional Directors involved. A Limited Company is straightforward to set up although you will have more paperwork to submit during registration, and through annual reporting. You will also need a chartered accountant to submit your annual accounts. Certain elements of your business and financial details are published by Companies House so there is less privacy although sensitive information is not included

Limited Companies pay corporation tax on the profits and there are often measures which can be used to reduce tax liability. This is one of the advantages associated with this option - as is the reduced personal liability. Limited Companies are distinct from you as an individual meaning if your business encounters challenges, your personal assets are typically protected. You will also benefit from increased credibility which can be useful when presenting yourself to customers, funders and others.

3. Partnership: Sharing the Journey (and the Risks)

A partnership is ideal if you're teaming up with one or more friends, family members or colleagues to launch your online business. In a partnership, you all agree to share the profits, losses, responsibilities, and risks of running the business together. It's similar to being a sole trader in the sense that partnerships are unincorporated entities, and the partners are personally liable for any business debts or losses. The business accounts remain private

Each partner is accountable for the actions of other partners so they are best suited to circumstances where each partner is fully committed and aware of their roles and responsibilities. Profits and losses can be shared according to pre-determined agreements, and each partner pays tax on their share of the earnings using their own self assessment process. As with sole traders, there is limited opportunity to use tax efficiency measures and the business may be less appealing to funders and others.

4. Limited Liability Partnership (LLP): Combining Flexibility with Protection

An LLP offers a blend of the partnership structure and the limited liability protection of a limited company. This means your personal liability is limited to the amount you invest in the business.

LLPs also require registration with Companies House and HMRC, and similar to limited companies, they have annual reporting and filing requirements. An LLP can have two or more members, and these members can be individuals or even other companies.

The responsibilities and profit-sharing arrangements for members are outlined in an LLP agreement. Each member still needs to file a personal Self Assessment Tax Return annually and pay tax on their share of the profits, along with National Insurance contributions to HMRC. However, unlike limited companies, LLPs don't file company tax returns or pay corporation tax.

Which one is right for you and your business?

The right business structure for you will depend on your intentions and aspirations. If you are starting your own business then sole trader or limited company are the popular options. If you are starting up with one or more other individuals then the partnership options may be suitable although you can still opt for limited company status with more then one director.

It is common for small businesses to start up as sole traders or partnerships but if you are planning to grow your operations then you might want to consider limited liability (company or partnership) status right from the start. Although it is common practice for business owners to change company status further down the line, you should not underestimate the administration, announcements and re-verification processes which are likely to be required. This is a particular consideration for ECommerce companies who potentially interact with a high number of service providers including websites, marketplaces, financial institutions, utility companies, software and subscription providers.

What did I do?

From my own experience I can say that I have no regrets about starting as a sole trader as it was the right thing for me to do at the time. I had a busy paid job and my online selling ventures were very much at the hobby level. I did not consider myself as a business for over two years but once I reached thresholds I then registered with HMRC as self employed/ sole trader.

For the next ten years, I operated as a sole trader and, during that time, I saw many milestones such as employing staff, registering for VAT, obtaining my trade mark, importing and exporting, renting out premises and many more. I could easily have continued as a sole trader but, by 2018, my business had grown and it was much more complex with lots of suppliers, service providers, products and sales platforms. I was selling internationally and I needed European VAT numbers, I was opening overseas bank accounts, importing my own products. My turnover had reached £350k. I wanted to explore new directions but doing so as a sole trader no longer made sense both for operational and credibility reasons - and because I was carrying an enormous amount of personal and financial liability.

I started the process of moving from sole trader to Limited Company status during 2018. It involved registration with Companies House and HMRC, transferring my VAT number and EORI (used for imports/ exports) number, opening new bank accounts, setting up new insurance policies, advising all of my suppliers and service providers, going through the reverification process on payment providers such as Paypal and marketplaces such as Amazon, Ebay and our website. There was a period of closure for the old sole trader accounts and the transfer of details across to a new accounts system more suited to a limited company.

“How did it go” I hear you ask “How did you feel?” Well one of the hardest things was leaving behind Mike, the accountant and book keeper who had been with us since the beginning. It turned out that Mike did not deal with chartered accounts for Limited Companies and so I had to engage with one who did (we still miss you Mike…!) Otherwise I remember the process feeling a bit like unravelling badly tangled wool and then rolling it back up again. I recall getting to the end eventually - and with most of what I needed in place but there were definitely tears, cursing, falling asleep whilst ‘on hold’ and much banging of mouses on desktops. I am sure it felt torturous at the time although, the same phrase may apply here as allegedly applies to childbirth i.e it is a pain soon forgotten. I should have done it far earlier than I did but, once I had made the switch to Limited Company, my business was able to take off again with more confidence and imminent opportunity.

My best advice to you is to look ahead as far as possible and think about the direction you want to take. If you are committed to growing this business then you should seriously consider limited company status at, or shortly after, the point of setting up - or at least when you can more clearly see how things are unfolding. If you are still uncertain about where your business journey will take you then relax and just opt for sole trader or partnership status. However, I do suggest you keep this under review and if your business needs to switch then give yourself plenty of time to make the change.