When you begin working for yourself one of the first decisions you will have to make is which structure is best suited for the business. There are 2 main types of structure, you may choose to be a sole trader or you may decide to set the business up as a limited company. Both structures each have their advantages and disadvantages, so its essential that you understand what each offers your business.
Here we are going to have a look at some of the differences, advantages and disadvantages each business structure may bring.
A sole trader is essentially a self-employed person who is the sole owner of the business and is generally the simplest and therefor most popular business structure. If you are thinking of setting up as a sole trader you can do so by visiting the GOV.uk website (which you are required to do for tax purposes).
Advantages to setting up as a sole trader
• It is the easiest structure to put in place for your business and aside from the yearly tax return involves very little paperwork.
• Personal details are much more private than as a limited company which are required to publish their details publicly with companies house.
Disadvantages to setting up as a sole trader
• Not viewed as a seperate entity by law, you will have unlimited liability and should the business ever go into debt as the business owner you would be personally liable and could potentially lose personal assests.
• When a business is trying to raise finances banks and other investors tend to prefer dealing with limited companies which limits the opportunity of expansion opportunites for sole traders.
• Tax rates are more favourable towards limited companies than towards sole traders once you reach a certain level of earnings which may make it less financially lucrative to remain as a sole trader.
A limited company is a business structure that is entirely seperate from its owners/shareholders and managers/directors and has its own legal identity (this remains the case even if it is run by just one individual).
Advantages to register as a limited company
• A limited company has the benefit of limited liability and the incorporation procedure forms a legal distinction between the business owner and the business itself. This means that should anything go wrong with the business your personal assets are not in danger.
• Occassionally limited companies can be more beneficial and more tax efficient than sole traders once your earnings are over a certain level. Rather than paying income tax (as you would as a sole trader limited companies pay corporation tax on their profits and as of now this offers a kinder tax rate. There are also a wider range of allowances and tax-deductible costs that can be offset against a limited companies profits.
• The name which you register your company as during its incorporation will be exclusive, meaning no other company can use it, protection which sole traders are not offered.
Disadvantages to register as a limited company
• As a director of a limited company you have added responsiblities which include the Director’s Fiduciary Responsiblities (which outlines what you must do legally). Included in this you’ll need to file a yearly tax return, aswell as annual accounts.
• Due to these added responsiblities and paperwork becomming a limited company can be costly and time consuming. You’ll either need to sort the extra paperwork out yourself or hire an accountant to handle it. There is also a cost involved in setting the business up aswell.
• Details of directors and your companys earnings will be made public as your are required to provide these details to companies house meaning less privacy.
Deciding which business structure is right for your business can take a little time but it is an important decision, and one which could have major ramifications over the years ahead, so you want to choose the structure best suits your circumstances.
Keep in mind that if you start out as a sole trader, and later on wish to form a limited company, it is possible to do so.