As a startup, one of the most important decisions that you will make is choosing a legal structure for your company. It’s always worth giving time to think carefully about which structure best suits you and your business.
This short article will help you understand the differences between the two most common legal structures for small businesses, ‘Sole trader’ and ‘Limited company’.
The sole trader route is the most popular way of running a business in the UK. It’s without a doubt the simplest way to start a business. Sole traders are the only legal structure that doesn’t need to be registered at Companies House. Infact all you need to do is inform Her Majesty’s Revenue and Customs (HMRC) that you are working as self employed and complete an annual self assessment tax form. As a sole trader you run your own business as an individual. You and your business are the same thing.
Advantages of sole trading:
- Establishing, running and winding up your business is simple. This also has cost benefits as you won’t need to pay for any expensive accountants.
- As you and the business are the same thing, you pay income tax on the profits your business makes, not corporation tax. Which depending on the degree of profits your business makes can be more cost efficient.
- You are not answerable to any shareholders, which gives you complete control of your business and its direction.
- There is no requirement for you to file accounts or other detailed information at Companies House, giving you and your business greater privacy.
Disadvantages of sole trading
- You have unlimited liability. As a sole trader there’s no legal distinction between private and business assets. Because of this, you will be held personally responsible for all your business losses and your personal property can be used to settle debts.
- It’s harder to raise capital. It becomes harder to gain investments as a sole trader as you are unable to transfer an interest or share in the business to investors as security for their investment.
GOV.UK defines a limited company as an ‘organisation that you can set up to run your business – it’s responsible in its own right for everything it does and its finances are separate to your personal finances.’
- You have limited liability. Unlike a sole trader, the company is liable for its losses, not you. Infact, owners of the company are legally responsible for its debts only to the extent of the amount of capital they invested.
- You might get a tax benefit. Unlike sole traders, limited companies are taxed under corporation tax. Corporation Tax is currently set at 20%. However, the government has stated its intention to cut Corporation Tax to 17% by 2020.
- You get a privileged status. A limited company trades under the suffix Ltd or Limited; this provides an element of status that cultivates a greater level of trust from investors, fellow business owners and the public.
- You can protect your trading name. Due to the rules and regulations surrounding limited companies, the name of every Limited Company, including yours, will be unique.
- A much larger administrative burden. As a limited company you will have to undergo certain preordained procedures for different situations. You will also have to retain various areas of information in your Statutory Registers.
- You lose your privacy. A limited company is required to disclose certain private information. For example, as a limited company you must provide Companies House with information on all significant people of control, including officers, directors and shareholders. Additionally, each year you are required to fill in Annual Accounts forms and an Annual Confirmation Statement declaring your company’s finances.
- Expensive accountancy fees. Unlike a sole trader, limited companies may have to fork out large accountancy fees as the accounts for launching, running and closing down your business are slightly more complicated. (However, nowadays most of these tasks can be done fairly cheaply online.)