When you’re first starting out in business it can feel like there are a thousand things you need to decide. And to be honest, there are quite a lot of things you need to think about! But one of the first, and possibly the most important, is the structure of your business. This decision affects a lot of the next decisions you make, including how you register your business, what insurances you need to take out, how much ta you pay and even the kind of accounts you need to file. So, how do you decide what company structure is right for you?
What’s The Difference?
For most new business owners, the choice boils down to two options: sole trader or limited company. But if you’re not sure what the difference between the two is, we’ve got some basic tips for you:
Sole Trader: A sole trader is essentially a self-employed person who is the only owner of their business. It’s the simplest type of business structure out there, and its often how small businesses start out. That’s one of the reasons it’s the most popular business structures out there too! It’s really easy to set up, but you will still need to register as a sole trader for tax purposes.
Limited Company: A limited company can run in a lot of similar ways to a sole trader, except the business has its own legal identity. This type of business structure separates the liability of the businesses from the individual business owner, shareholders and managing directors. You can run a limited company even if you are a one-man band – it’s just a matter of structure.
Of course, like almost anything in life, there are pros and cons to each business structure, so it’s important to look carefully at the options before making your decision.
Pros and Cons Of Being A Sole Trader
Being a sole trader is one of the simplest and easiest business structures you can choose, and it’s still one of the most popular structures for new start-ups. The main pros of being a sole trader are:
- It’s easy to set up, with relatively little paperwork to do. Just an annual self-assessment tax return really.
- You have a lot more privacy as a sole trader – mainly because you don’t have to register your details with the Companies House database.
And of course, there are some disadvantages too, including:
- Because a sole trader is the business as far as the government is concerned, you as the business owner have unlimited liability. So if anything goes wrong, like a lawsuit or your company gets into debt, all of it rests on your shoulders. You could even lose personal assets if things go really wrong.
- Raising finance can be difficult, since banks and investors tend to prefer limited companies. So if you need funding to expand your business, you could struggle.
- Tax rates for sole traders aren’t the best, as tax brackets tend to favour limited companies. This isn’t as much of a problem when you’re a small business, but when you get to a certain level of income you could feel the pinch.
Pros and Cons Of Being A Limited Company
So, if those are the pros and cons of a sole trader, what about a limited company? Some of the positives include:
- Limited liability. Unlike a sole trader, the incorporation of a limited company creates a legal distinction between the business owner and their business. This means your personal assets aren’t at risk at all, and if anything goes wrong you only stand to lose what you put into the company.
- Broadly speaking, limited companies are much more tax efficient than sole traders. They benefit from kinder tax rates, and pay corporation tax instead of income tax, along with a range of allowances and tax-deductible costs that can be claimed against profits to reduce that bill. You may need a good accountant to help you navigate this, but you will still end up saving money.
- Once you’ve registered the company name, no one else can use it – protecting your brand legally.
On the other side of the coin, some downsides to being a limited company include:
- There is a lot more work that has to go into setting up and running a limited company – including new responsibilities. One of these is called a Directors Fiduciary Responsibility, which outlines what a limited company director must do legally. You have to file one annually, along with annual accounts.
- These extra things to do can be time-consuming, and costly if you forget about them. That’s why so many limited companies hire accountants to help them manage it all.
- Your information isn’t private. The details of all limited companies can be found on Companies House – including directors names, addresses and your companies’ earnings. This is another level of transparency that you might not be ready for.
Ultimately, it’s up to you which company structure works for you. But before you make that decision, make sure you understand the pros and cons, and more importantly what you need to do. If you would like some impartial advice on choosing a company structure, that’s where we can help. Just get in touch with the team to book your free consultation.