So, you've made the decision to start a business. Whoop Whoop! But wait, what type of business? All businesses have to have a legal structure and this is one of the first decisions you need to make. Are you self employed? A sole trader? Or maybe a Ltd company would suit you better? What about a partnership? Or could you be a very confused novice business owner wannabe surfing multiple websites trying to take in the differences between them all? This is definitely the category I fell into!
When we first had to decide what we wanted Caged Tiger to be, we were torn between Sole Trader and Ltd Company. Unsurprising these are the two categories that the majority of new business owners fall into. Caged Tiger could have operated as both and each had their advantages and disadvantages. Setting up as a Sole Trader is easier and when you really want to get your business started, it can be tempting to go straight down this route. We found ourselves making the decision in our head only to form a counter argument for the alternative almost straight away!
So what is the difference between a Sole Trader and a Limited Company, and what are the pros and cons with them both?
Sole Trader vs. Limited Company
A Sole Trader is a basically a self employed person who solely owns their business. It's that simple!
A Limited Company keeps the business owner and the business itself separate, creating the business with its own legal identity.
Sole Trader Pros:
Quick and Easy:
As I've already said, setting up as a Sole Trader is the quickest and easiest method of starting a business. Compared to the other business structure alternatives, there is very little paper work and this is appealing to a lot of people. You will still have to complete an annual self-assessment tax return, but on the whole this is a lot less in depth than the other options.
Privacy:
As a Sole Trader, you will not have to add your business to Companies House. This means that you are afforded a greater level of privacy than those who chose to set up an incorporated company.
Sole Trader Cons:
Unlimited Liability:
In short, all your affairs are one. What do I mean by this? Basically your business and your personal finances and assets are not viewed as a separate entity under UK law. If your business were to get into financial trouble, then the business owner will be personably liable and therefore could end up losing personal assets if the business failed.
Trust:
Banks are often more likely to favour a Limited Company. This can mean that if you want to get loans etc then they can be harder to get. In the long term, this can restrict any growth and expansion plans you may have.
Tax Implications:
Although at first a Sole Trader may be the most lucrative option for you, tax rates for Sole Traders and Limited Companies vary and are often better for Limited Companies. It may be that as your business grows, this starts to limit your business more.
Limited Company Pros:
Limited Liability:
So unlike a Sole Trader, the business and business owner are legally separated. This essentially means that if your business gets into financial trouble then your personal assets are not at risk and you only stand to lose what you have put in to your business.
Tax Efficiency:
Rather than paying Income Tax, a Limited Company will pay Corporation Tax on their profit, which tends to be a kinder level of taxation. There are also other benefits and allowances and tax deductible costs that can be claimed against a business's profits which can be a great help in growing a business.
Exclusivity:
A business brand is important and once a Limited Company has registered their company name, it cannot be used by anyone else. This is not the same for a Sole Trader.
Limited Company Cons:
Legal Duties:
Unlike the simplicity of the Sole Trader, when starting a Limited Company you are essentially agreeing to legal responsibilities known as Director’s Fiduciary Responsibilities. These regulations outline what a Director of a company is legally obliged to do and these cover the annual filing of accounts and returns.
Expenses:
As expected, the added responsibilities mean added costs. Alongside the fee to incorporate your company, many people opt to pay an account to handle the time consuming paperwork and submit your accounts.
Transparency:
Unlike a Sole Trader, your companies details will be public and searchable on Companies House. As a Limited Company your directors and companies earnings are required to be public.
So although I have outlined the main differences above, I have to reiterate that I am not an expert! All of this info was garnered through searching through multiple online resources and the end decision will be specific to you and your business needs.
For us we decided to set up an appointment with an accountant to get some advice on this and also other general questions about starting the business. This was a free consultation and I would recommend it to clarify anything you aren't 100% on. Ours acted almost as a therapist, calmly asking us to say which we wanted to become and the reason why. Once we said we were leaning towards becoming a Ltd Company and gave our reasons behind this, he finally gave his verdict and said he thought that was indeed the correct choice for our type of business. Cue smug faces and the feeling that we are smashing this business malarkey. Eat your heart out Alan Sugar!
From this point we had the accountant register our business at Companies House which gave us our Incorporation Certificate and number. You will need this number to set up a business account in your companies name and will need it handy for setting up accounts with suppliers etc. Our accountant then set up the necessary registrations with HMRC for us meaning I did not need to deal with that. I think I speak for a lot of novice business owners when I say God bless accountants!
Now we decided who we were, we just needed to create a website, fill it with product and sell it. Easy, right?!