What are your business Goals ?
One of the key questions new business owners ask is whether to work as a sole trader or trade through their own limited company. Setting up as a either structure will bring its own benefits and drawbacks. Everyone’s situation is different and what’s right for one person might not be right for another. There are many factors that might influence your decision, for example:
- Your future plans to grow the business
- What your current turnover is and how much profit do you make
- What level of commercial risk is your business exposed to
- Does customer perception matter to your business?
- Would you like to sell your business in the future?
- Do you have the time to manage a limited business?
As you can see, there are lots of things to think about. Ultimately, it is your personal preference, your goals and ambitions for your ideal business, that matters when making this decision. Operating as a sole trader offers simplicity or you might prefer the security of having ‘limited liability’ through a limited company. In order to make that decision the guide below offers this information at your fingertips. Starting with the sole trader option let’s take a closer look at the advantages and disadvantages of both legal structures.
What is a sole trader?
A sole trader is essentially a self-employed person who is the sole owner of their business. It’s the simplest business structure out there – which is probably why it’s the most popular – and you can set up as one via the GOV.UK website (you’ll need to do this for tax purposes).
Sole trader advantages
- A sole trader legal structure for your business is the easiest to set up and there is very little paper work, other than an annual self-assessment tax return. This is one of the main reasons why it has been proven to be such a popular option.
- Operating as a sole trader allows greater privacy than incorporated businesses, whose details can be found via Companies House.
Sole trader disadvantages
- As a sole trader, the business owner and the business are treated as one entity. For example, if you have business debts as a sole trader or your business goes bust your personal finances and assets are in danger. This is because legally there is no difference between your assets and the business’ assets. As such, sole traders could lose personal assets if things go wrong.
- As well as your finances, you will need to keep in mind any legal disputes. If you are a sole trader then you will need to make sure that you have various different small business insurance policies in place to avoid getting sued personally.
- Raising finance can be tricky, as banks and other investors tend to prefer limited companies. This limits the expansion opportunities of sole traders.
- Tax rates on sole traders aren’t always as kind as they are on limited companies. When you reach a certain level of earnings, it might not be quite as lucrative to stay a sole trader.
What is a limited company?
- A limited company is a type of business structure that has its own legal identity, separate from its owners (shareholders) and its managers (directors). This remains the case even if it’s run by just one person, acting as shareholder and director.
So, what benefits and drawbacks does setting up a limited company bring
Advantages of LTD Company
- One of the biggest benefits of having a limited company is that you have limited liability as incorporations forms a legal distinction between the business owner and their business. This means that personal assets are not exposed – you only stand to lose what you put in to the business.
- If you want to operate as a sole trader, you will be completely responsible for your business and its finances.
- Another very prominent advantage a limited company has over sole traders is that operating your business through a limited company is more tax efficient. This is because a limited company owner only has to pay corporation tax and dividend tax. Whereas a sole trader will have to pay tax on all of the profits that are above their personal tax allowance (£12, 500 for the tax year 2019/2020). In addition to this, there’s a wider range of allowances and tax deductibles costs that a limited company can claim against its profits.
- Once you have registered a company name nobody else can use it, in contrast to sole traders who aren’t offered the same protection.
Disadvantages of a Limited Company
- Operating as a Limited company brings added responsibilities. These are known as the Directors Fiduciary responsibility, which basically outlines what a limited company director must do legally. You will need to file a yearly annual return as well as annual accounts
- In contracts to sole traders’ information on your business can be found via Companies House, details on directors and your company’s earnings are required to be shown publicly. This sort of transparency may not appeal to all.