When starting a business one of the key considerations is which legal format it will take. There are several options such as a sole trader, limited company, partnership, limited liability partnership, charity and the list goes on. A quick google search on this subject and you will be inundated with tips and advice from a wide variety of sources. “Why that’s great” I hear you say - which in many ways it is, however it can also mean it’s a bit of a minefield! That’s why seeking advice and discussing options with a relevant professional is extremely beneficial - always remember your circumstance, situation and business are unique to you 😀
In this short piece I’m going to share some considerations and difference between having a sole trader business and a limited company.
SOLE TRADER
As a sole trader you and the business are one. There is no legal separation. It’s the simplest business structure and easiest to get up and running. You can register as a sole trader online at www.gov.uk and you annually have to submit a self assessment tax return which will include a summary of your sales, costs and profits. These profits along with any other income sources and after deducting your annual personal allowance (a value of money you can earn tax free which is currently £12,500 for the tax year 2020/21), will be taxed as income at the relevant rates.
Advantages
Simple and easy to set up
Private as information is not generally publicly available
Disadvantages
No legal separation between you and your business meaning any liabilities or debts that may arise will be your responsibility and all of your personal assets may be used to pay them off - something to think about in terms of risk.
It may depending on your income levels be more tax efficient to run your business as a limited company.
It can be harder to raise finance.
LIMITED COMPANY
As a Limited company you and the business are separate entires in the eyes of the law. Limited companies have shareholders and are run by legally named directors (if it’s just you in your business you can be both the shareholder and director). You have to register your company at Companies House, provide an annual return, and file accounts annually in a specific format. Corporation tax is payable on any business profits. And any money you pay yourself by way of a salary or dividend income is taxed as Income tax either automatically as part of a system call PAYE or via completing a self assessment tax return.
Advantages
Looks very professional and this may influence potential clients.
There is a legal separation between you and your business meaning you have limited liability - this lowers the potential risk.
It can be more tax efficient.
Disadvantages
There are many legal requirements and duties that come with Limited companies. This can be cumbersome and more costly as it is likely you will need to engage the help of professionals along the way.
Information held at Companies House is publicly available.
This is a very brief introduction to this subject and there are lots of other things that make impact on the most beneficial set up for your business. So which is the best way for you? I would suggest discussing the options with a relevant professional who can gain more insights into your situation and advise you accordingly, meaning you set off on the right path and hopefully avoid any unnecessary costs or time.
