When deciding to set up your own business there are few important things to consider. You have to decide on the type of structure for your business, and there are a few to choose from. Each structure comes with its own positives and negatives but you will definitely find the right one for you. However, to be on the safe side it is always recommended to speak to an accountant or financial advisor before setting things in stone.
The 2 most common ways to structure your business is as a Sole Trader or a Limited Company. The differences are highlighted below:
Sole Trader
A sole trader is a type of business entity where the owner and the business are treated as one and the same in the eyes of the law and regulations. If you start as a sole trader, you should register with HMRC the moment you start trading.
Advantages:
- - A sole trader has less responsibilities than a limited company. So when it comes to tax season you only need to prepare basic accounts and a self-assessment tax return. So there is less work for you and your accountant, keeping your costs lower.
- - It is common for businesses to make losses in their early years. This can be a benefit to you when starting a business. As it is possible to offset your business’ losses against the income you earned from your previous employment. Giving yourself a bit of a tax break.
- - As a sole trader you do not need to submit any accounts to Companies House. This is beneficial because accounts submitted to Companies house are open to view by anyone from the public. So if you want to keep that information private, then sole trader is the way to go.
Disadvantages:
- - Because the owner and the business are one and the same in the eyes of the law. The owner is personally responsible for any debts incurred by the business. So not only will the business’ assets be taken into consideration but also any personal assets.
- - A sole trader business cannot be passed on or down to someone else. Once the owner passes away the business ceases to trade.
- - Options are more limited for a sole trader when it comes to financing the business.
Limited Company
First and foremost, a limited company is a separate legal entity to the owner. As a separate entity, a business can accrue their own debts, buy their own property and assets and even sue or be sued as a business. There must at least be one director to manage the business.
Advantages:
- - The owner of a limited company has more protection when it comes to debts and money owed as a business. Because the business is a separate legal entity, it means that only the business’ money and assets are affected.
- - If the owner or owners of a limited company pass away, then the business can continue to trade as long as there are new owners.
- - It is usually easier to raise finances as well as increase your options available to you when raising finances.
- - A limited company can pay dividends to its shareholders, which is a tax efficient way for directors to earn their income.
- - The profits of a limited company are only taxed corporation tax at the end of their financial year, which is lower than income tax rates.
Disadvantages:
- - Annual accounts are more complicated to prepare. Not only do you need to submit more but this usually equates to more work for you and your accountant.
- - Less privacy about the business, as a limited company, a registered address needs to be provided which can be seen by the public.
- - Directors are treated the same as employees, so the business will incur NI contribution costs for wages paid to the directors.
- - It can be more difficult, time-consuming and expensive to wind-down or close a limited company
Thanks for reading this post, we hope you were able to learn some useful information. If you ever need help with financial services such as your tax returns then we are available to help. Please click here and complete the form or email us at contact@atroaccountancy.co.uk and we will get back to you as soon as possible!