When setting up in business, you will need to decide whether to register as a sole trader or a limited company. This can make a big difference to the structure of your business as it can affect the protection that you have personally, the tax you pay and the control that you have.
Pros and Cons of Being a Sole Trader
A sole trader is someone who is self employed and has complete control of their business. However, this does mean there are no fall backs and no one else to pick up the strain.
You will not be required to pay Corporation Tax, but you are required to submit a Self Assessment which could push your personal tax bracket higher. As you and your business are one and the same, you will be liable for any debts, and your personal assets can be seized to cover them.
Pros and Cons of Limited Companies
A limited company is a business entity that is registered with the government, with its own legal identity, and can have multiple owners or managers. It has limited liability, as any debts belong to the business and not an individual, meaning your personal assets cannot be touched by creditors.
You will be registered to Companies House meaning your name will be unique and you can minimise your National Insurance contributions by paying dividend tax rather than income tax.
However, you are subject to more legal obligations and more paperwork, and your business filings will be available for the public to see.
Key Legal Differences Between Sole Traders and Limited Companies
One of the key differences between the two structures is that of legal responsibility. As a sole trader, everything falls to you, whether it is debt, compliance, or regulations within your industry, whilst in a limited company this is the responsibility of the business as a whole and not any individual.
Tax structures also differ, as while a limited company must pay corporation tax, you can control how your own earnings are paid to minimise your personal tax burden. As a sole trader, all of your money comes through you and so you will need to pay tax on every penny that you earn.
Factors to Consider When Choosing a Business Structure
When choosing a business structure, you need to think about your long-term goals and how you see your business growing. If you aim to take on other partners or employees, then a sole trader status will not work. You also need to look at your potential earnings and what the tax implications would be to determine which business structure will be more profitable for you.
Comparison of Sole Trader and Limited Company Structures
Setting up as a sole trader tends to be a much cheaper option as there is less registration required, however, you will need to keep a close eye on your earnings to track what your tax bill will be. A limited company requires a lot more work, but also has a far greater potential for growth and can offer personal protection thanks to its limited liability factors.
Setting up a business is an exciting time, but you need to carefully consider your circumstances to find the business structure that works for your current situation and your future plans.