Are you new to beingself-employed? Or perhaps you are having a regular reflection on where you’re at in your business. You will no doubt have a lot of questions on your mind. One of the BIGGEST ones will be: What kind of business do I need to set up? Sole trader or limited company? Below we will explore what you need to consider in order to make your decision.
What legalities are involved in setting up a business?
No matter what the size of the business, every business must have a legal structure. Most businesses choose either sole trader, or limited company. However, there is also the option of a partnership or a corporation. This blog will explore more on the main two: sole traders and limited company. Let’s look at the different types and their benefits.
What is a sole trader?
Essentially, a sole trader is a self-employed person who is the sole and only owner of the business. It’s the simplest business structure, and all you need to do is set up via the government website. This is for tax purposes.
Becoming a sole trader involves little paperwork, as usually you just need to worry about the annual self-assessment tax return plus it is easy to set up. You also get more privacy, as limited companies can be found via the Companies House website.
However, sole traders are not viewed as separate from the business, which means they have unlimited liability. If the business gets into debt, then you personally are liable. You could therefore lose your personal assets. If you need funding for your business from the start, it can also be difficult raising finance from the bank and other investors as they tend to prefer limited companies for this reason. So, this means as a sole trader you are restricted with opportunities. Another disadvantage is that the tax rates aren’t as great, so once you reach a certain amount of earnings, it’s not as profitable.
What is a limited company?
This business structure has its own legal identity. This means that the owners and managers, or shareholders and directors are separate from the business. This is the case regardless of whether it is run by one person or a few. The one person will act as the shareholder or director.
With a limited company comes limited liability. As there is a distinction between the owner and the business, your personal assets aren’t exposed, and the only loss can come from what the company has. Limited companies are also more tax efficient and profitable, as they pay corporation tax on their profits rather than income tax. You are also opened up to more allowances and tax-deductible costs that you can claim against. Also, once you have registered your name, it means it is protected from anyone else using it, unlike a sole trader.
However, there is a lot more paperwork and responsibilities involved in being a limited company. You have the Director’s Fiduciary Responsibilities, as well as a yearly annual return and yearly accounts. However, a trustworthy accountant can help with all this added paperwork and stress. Be warned though, your details and company earnings will be found for all to see on the Companies House website, so make sure you want that transparency for all to see.
Need more information?
We have delved into this topic beforehand, so to get more advice head over to ‘What are the perks and downfalls of registering as a sole trader?’ and ‘What are the perks and downfalls of registering as a limited company?’
If you want to start a business, you may find our blog post helpful called: ‘Want to start a business? Here’s your first 10 steps‘
As always, I am here to answer any questions you have about all things finance within your business. Just get in touch with McCarthy Browne today if you’d like to know more on this subject.