When you are starting out on a new venture, one of the immediate things to consider in the setting up phase is the legal structure of the business – whether to register as a sole trader or a limited company.
In order to make that decision, it is important to know what defines each one, the difference between the two and, most importantly of all, the pros and cons of each. Allow us to outline just that in this blog post, which will give you all the information you are looking for to help you make that key decision.
Roughly two times as many enterprises go down the sole trader route as opposed to the limited company direction. Why is this?
Putting it simply, a sole trader is basically someone who is self-employed and is the sole owner of their venture. It is structurally simple and that is most likely the reason why so many start-up businesses are set up that way.
Advantages of being a sole trader
The biggest positive of being a sole trader is how easy it is to set up, with paperwork kept to a minimum, aside from your annual self-assessment tax return. That leaves you with more time to get your business functioning how you want it to be.
You also get more privacy as a sole trader. You do not have to register your details at Companies House, for example, unlike a corporate business, which allows you to fly a little under the radar when it comes to being visible to your competition.
Disadvantages of sole trading
The biggest disadvantage of being a sole trader is that you are liable for everything, so if the business suffers a substantial loss it is on your head solely. This could lead to a loss of personal assets and eventually result in bankruptcy, which is something that must be considered when setting up as a sole trader.
Another problem you could find is raising capital, as banks and investment packages will tend to side with limited companies. That could leave your business with a ceiling that is impossible to break through and make expansion difficult.
A limited company has a legal identity of its own, which is different from those who own it and the directors of it, so the company stands on its own feet. That is the case whether the business is run by one person acting as the shareholder and director or a number of owners and managers.
Advantages of a limited company
The biggest advantage you will have if you register as a limited company is that it will have limited liability, as there is a clear legal differential between the owner of the business and the company itself, so all any one person can lose is the amount they invest into the venture.
Generally, limited companies offer a better tax efficiency than sole traders as they pay a Corporation Tax, which is usually a much kinder rate of tax. Limited companies can also claim against its profits from a much wider range of allowances or tax-deductible costs.
Disadvantages of a limited company
There are more responsibilities to a limited company, such as the Director’s Fiduciary Responsibilities, which effectively highlights the legal processes a company director must go through. This includes filing a yearly return as well as the annual accounts which is statutory.
They bring with its extra costs though, and they can be quite time-consuming. That means you are either going to have to deal with added paperwork on your own, which detracts your attention from the day to day work of running your company, or you will have to employ someone to do that which is an added cost.
The other drawback with a limited company is that all directors and their details, as well as the earnings of the company, will all have to be filed with Companies House, which will be out on the public domain for anyone to see. This is not always a popular thing for an investor or shareholder.
We have outlined the positives and negatives of a sole trader vs a limited company, so the decision is now yours to make, with the knowledge of how your decision will impact you as an individual as well as the profit margin of your company to be taken into account.
For more advice, please contact us at Riz & Co today.