Do I register as a limited company or as a sole trader?

There is a myriad of factors to consider when starting up a new business. The first decision you should prioritise is whether to operate as a limited company or sole trader. Both have their advantages and disadvantages, and the decision will significantly affect your tax levels and personal protection.

Business Rescue Expert – a leading insolvency practitioner firm within the UK – are outlining what you can expect and the advantages of both business formations.

Limited companies

A limited company is, quite simply, registered at Companies House. Thus, the registered company is deemed entirely separate from you as an owner. As such, your personal finances are afforded the very same protection should your company fall into tax arrears or, in the worst case, insolvency. Ultimately, the company is responsible for the debts, not you. Similarly, companies will enter into contracts with the organisation.

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Limited liability

Following on from the above point, the separate legal entity provides you, as an owner, with limited liability. Your personal liability for any accrued debts is substantially reduced unless you have any personal guarantees within the company. Sole traders, on the other hand, are responsible for the company debts. Only in the case of fraud or where any misconduct has been identified by an insolvency practitioner, for instance, is the director/owner personally liable.

Tax benefits

As for both formations, there are particular tax benefits. In the case of limited companies, directors and owners can benefit through the likes of taking some of their salaries as a dividend. A dividend is not subject to any National Insurance contributions. However, unlike sole traders, limited companies must pay corporation tax.

Pensions can also provide tax benefits to your business. For instance, personal pension contributions can be deemed an allowable business expense. Therefore, the contributions can be offset against your payments towards corporation tax.

Business name

Your intellectual property is protected when registering your company. If your business is registered at Companies House, the name cannot be used by any other business. However, there are no restrictions for those operating as a sole trader, so you must err on the side of caution.

Finance

There comes a point in many companies life where they require additional finance. In most cases, it’s the beginning of business life. Limited companies will find it much easier to access finance, offering a certain reassurance to the lenders. As opposed to this, poor credit scores and previous defaults can negatively affect a sole trader’s ability to gain finance.

Sole traders

Setting up as a sole trader is a popular option for many individuals starting their business life. Starting up as a sole trader remains one of the quickest and easiest ways to get your company up and running. Of course, you do not need to register at Companies House, substantially reducing the paperwork. However, you will still need to inform HMRC that you’re operating as a sole trader. Similarly, there is less need for professional advice, significantly reducing setup costs and the like.

Control

As a sole trader, the control of the business, ultimately, remains with you. You do not need to conduct with any other directors, shareholders or compromise the objectives you had in mind for your company.

In addition to the increased control, operational flexibility is another major bonus. You can make quick and simple changes to your business model to further expand growth and revenue. You can amend the pricing structure of popular products, or even remove those that you no longer have faith in. You can adapt to an ever-changing market, keeping your business competitive.

Tax allowances

Similar to limited companies, there are certain tax allowances for companies. Should you need to buy equipment, stock, vehicles for the benefit of your business, you may be able to claim capital allowances – a form of tax relief. A sole trader is also able to withdraw cash from their business without any tax effects.

Profit

Should your company begin to make a profit, that profit is yours. At the start of business life, many sole traders choose not to employ anyone, which can keep costs low. You will retain all profits from your company.

Before making your decision, we suggest speaking to industry peers and seeking specialist advice to ensure you opt for the most suitable structure for your business.

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