New business - what type...?

[Whickerman]

I'm about to start a small business with a friend of mine, supplying a service to one customer. It won't take the place of our jobs but will be a nice little after-hours earner. My question is what are the pros and cons of partnership (with equal stakes) vs ltd company (again, equal stakes) vs sole trader (with him as an employee)?

[madmaggot]

I would think very carefully indeed before entering into a partnership, with anyone. You will both be equally responsible for any debts that the business may incur. Most start off needing both signatures for transactions but then the logistics of this mean that they end up, for instance, with a few cheques signed by one of them, ready for use. Also, you will both get any profits in proportions according to the agreement. If you are a sole trader with your friend as an employee you are in full control of the finances but are obliged to pay his wages and you will be left with the profit if there is any.
If you start with a ltd co you will both be employees of the business, your personal assets will be safe (unless you put them up as surety against overdraft or loan agreements, etc). The profits will belong, after tax, to the share holder(s).
The above is very brief and IMO if you do not know the fundamental differences between the types of business you will probably not be able to run your business properly.
Do not make the mistake of thinking that if you are busy you will be making a profit, it doesn't necessarily follow!

[buildersmate]

Good advice. Partnerships work fine for many pairs.
However there are almighty problems what they go wrong, and they can go wrong when the expectations or standards or ethics of one partner are different from the other. Because the legal framework that sets up the rule of a partnership are normally very loose. There must be a heck of a lot of trust at the outset. Not recommended if you don't 'know' your partner very very well.

[Skyline D]

Leaving aside all of this, if you literally have ONE customer and aren't actively trying to find others, and especially if that customer dictates when you do the service (whatever that may be), then the Revenue will insist that you are in fact an employee of that customer and that they employ you and pay you via PAYE anyway.

On the question you actually asked, the others have by and large covered it. If you don't want to take any profits actually out of the business and instead want to build it, then limited company is probably best. It has a more advantageous tax regime generally (though again the Revenue may deem things differently as it does for certain service companies). However, if you do want all the profits in your hands as you go along, self-employment will be better and whether you prefer to do it yourself with your friend as an employee or do it between you depends largely on the deal the two of you strike. There is a lot more security in being an employee (he would get sick pay for instance, you wouldn't) but the tax regime isn't as kind.

[buildersmate]

The way around the issue that you raise in your first paragraph, Skyline, is to run the entity as a LtdCo.

[Whickerman]

Thanks a million for the answers guys.

I should state that i do know the differences between the entity types, but the input regarding partnerships is particularly welcome as i don't want this to end up creating any bad feeling in what has been a life long friendship.

I think that a ltd co is the way to go in this case.

[Skyline D]

Not necessarily BM. The revenue may still decree that the company is a service company and demand that they are only paid under deduction of tax.