How was the company set up?
The company was set up as a sole trader. There were very good reasons (see below) why it was decided to be a sole trader rather than go into partnership or become a private limited company.
Image: The owner of No. 31 Hair and Beauty, Jilly Lynch.
The owner is Jilly Lynch. Jilly is therefore solely responsible for the success or failure of the business. If the business had to close she would be responsible for the debts of the business. Also, the premises have been secured partly through using her home as security to raise the money to move from the original premises.
Jilly's husband, Paul, helps with certain aspects of the business, for example, managing the accounts, but he is not an owner and is effectively employed by Jilly to help out.
Jilly, as the sole owner, is also able to take all the profits from the business. One of the reasons for not setting the business up as any other form of legal entity was that there are a number of advantages to being a sole trader despite the liability that does exist if the business fails.
- Sole traders do not have as expensive accountancy bills - private limited companies have to file their financial returns to Companies House and this adds to the cost.
- As a small private limited company it can be difficult getting credit because the supplier knows that you are not liable for any debts and so they can be left 'exposed' if your business was to fail with large unpaid debts. Jilly, therefore, finds that the 'vulnerability' of a sole trader is an advantage when negotiating credit with suppliers. Suppliers may believe that sole traders will take more care in ordering because they know they are ultimately personally responsible, suppliers may feel more secure, therefore, in dealing with a sole trader.
- For a retail trader she believes that as a sole trader she has more flexibility and it is more convenient for her needs.
- Private limited companies may only allow money to be taken out of the business as dividends, whereas as a sole trader, she is totally responsible for how any money generated from the business is used.
- As a private limited company, every single thing must be accounted for. This can be time consuming and also costly to monitor and maintain. Whilst Jilly does have accounting systems and procedures, the rules are not as tight and, therefore, she feels she can devote more time to worrying about how to deal with customers and other aspects of the business.
- There may be certain tax benefits associated with being a sole trader rather than a private limited company - because private limited companies have to account for everything, the tax liability may be more than in the case of a sole trader.