When you first set up your business you must decide what form it will take. Do you want to set up as a sole trader, a partnership or as a limited company? If it’s just you in the business, you can still choose between sole trader or limited company. The final decision lies with you but it is worth taking some advice on the subject as there are several issues to consider. Both options have their advantages (and disadvantages) which we are discussing today.
Let’s first look at the advantages you have as sole trader
Setting up your business as a sole trader (or self employed) is generally easier and involves a lot less paperwork. All you have to do its let HMRC know that you have started trading and you’re off. At the end of the tax year, you submit a self assessment tax return and you’re pretty much done. There aren’t many formalities you need to follow. Although this will change in the near future with the introduction of Making Tax Digital.
There’s greater privacy when you set up as a sole trader. The accounts of a limited company have to be submitted to Companies House who publish them, for anyone to see. As a sole trader your accounts and with that how much you earn are your business, and yours alone (and HMRC’s, of course).
Now let’s see the advantages of a limited company
The main reason many entrepreneurs set up their business as a limited company is lower taxes. As a director of a limited company, you can choose to take a smaller salary and take out the rest as dividends which are not currently subject to national insurance contributions although there may be some tax on dividends depending on the level of your income.
As a director of a limited company you also have a limited liability. This means you are not personally liable for any financial losses of your company (unless, of course, fraud has taken place). This means your family home is safe and cannot be auctioned off to pay for outstanding company debts.
Some larger companies prefer dealing with limited companies, rather than sole traders. This means that you are more likely to land larger contracts if you’re set up as a limited company. It gives you a more professional image.
The same is true for funding. Limited companies find it generally easier to successfully secure business finance.
As soon as you register with Companies House, your business name is secured. No other company will be allowed to trade under your name or even a very similar name. As a sole trader this can be an issue especially if a larger company registers their name after yours. You might have to battle it out in the courts or go through the expensive process of changing your company name and rebrand.
Conclusion – Sole Trader or Limited Company?
As you can see from the advantages of the different types of business, there are advantages for both types of business. It depends very much what is important to you as a business owner whether you decide on setting up as a sole trader or limited company. Alba are able to advise you on the best course of action for your particular circumstances.
If you would like to speak to us about your particular circumstances, please don’t hesitate to get in touch. You can reach us either via email admin@alba.uk.com or on the phone 01509 853779. And have a look at our Business Start-Ups page to see what else we can help with.
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