What to choose for your small business startup: Sole Trader or an LLC?

When first deciding to start your own business, you will be faced with making an important decision: choosing the business form suited to your business type, your budget and future plans for expansion. The sole trader and the LLC are two different business forms suitable for small business startups, available for incorporation in virtually any jurisdiction (although they may have different names).

So, what to choose for your small business startup: the sole trader or the limited liability company? We look at the definitions for each of these two business forms, their advantages and the main issues or red flags entrepreneurs should take into consideration.

The sole trader: starting up small

The sole trader is generally accepted as the simplest business form because it is essentially a one-man business. The entrepreneur is self-employed and the only owner of the business. It is the simplest business form from an incorporation and an accounting/reporting point of view; this is why it is a widely popular type of business form for start-ups.

The taxation of the sole trader is simpler than in the case of corporations, such as the limited liability company. The entrepreneur will be taxed on his or her earning as a self-employed individual according to the local taxes for individuals. This can be an advantage, according to the annual profits made by the small business, however, investors are advised to seek proper tax counseling in order to understand how tax rates can change in some countries according to the level of profit/earnings.

An important issue to consider when opening a sole trader is that the entrepreneur, being the sole owner of the business, is also the only one liable with all of his assets for the debts of the company. The sole trader is not a separate legal entity, with legal capacity, thus the identity of the business and that of the owner are inseparable.

The LLC and the sole trader in Ireland are both two types of business forms taken into consideration by investors willing to start a business in this country. There are many advantages for companies in Ireland and taxation is one of them, an important issue to consider when choosing the business form.

The LLC: looking towards the future

Investors in Hong Kong can open a limited liability company or a sole trader as a means of starting a business in this city that offers important tax and location advantages.

The choice between the sole trader and the LLC is often based on the essential difference in terms of liability between these two business structures: while the sole trader is not a separate legal entity and the owner is fully liable, the LLC has legal capacity and the owner is only liable to the extent of the capital invested in the company.

The taxation and annual reporting principles are generally lighter for the sole trader, however, in jurisdictions like Singapore, where the taxes are low, it may come as an advantage to open a LLC and not bear full liability. Corporations can also benefit from various tax incentives or tax advantages. In terms of start-up costs, the LLC will require a minimum share capital, and this requirement will depend on the chosen jurisdiction.

A limited liability company is a type of business that, once incorporated, offers different perspectives for expansion and business growth. It can hire a number of employees which are sufficient for a small business or start-up and can own assets in its own name. Thus, the personal assets of the founders or the founder are not exposed. In many jurisdictions, opening a limited liability company can be accomplished with only one director and one shareholder. The director will also have its fiduciary duties towards the company, however, these are different from the unlimited liability in case of the sole trader.

The choice between the sole trader and the LLC will be summarized according to available budget, business goals and future plans for growth. For some entrepreneurs, it may also be business-sector dependent. For example, consultants in fields such as marketing, legal, tax or business can find that the sole trader suits their needs. For others, like those who wish to open a software or tech start-up, the LLC will offer different advantages.

We recommend that you talk to a company formation expert who will be able to answer detailed questions about specific taxation, reporting and legal requirements for each of these two business forms before deciding which one to incorporate.