Sole Trader or Limited Company? Something that’ll face you as an aspiring entrepreneur is choosing the right legal structure for your business. With an assortment of options out there it can seem confusing to choose which might be the right one to adopt, but, more often than not, it’ll be a decision between these two.
With this in mind we’re taking a look at the pair of them, in order to give you a better idea about what adopting each structure involves and to outline the benefits and drawbacks associated with each one…
The Sole Trader structure
Essentially, this is the simplest structure. Many entrepreneurs adopt this initially as operating as a Sole Trader can be so much less complicated than starting out as a Limited Company. After informing HMRC, you can simply set about trading.
In contrast to running a Limited Company you won’t need to register with Companies House and you won’t need to pay corporation tax. Paperwork and red tape will be greatly reduced too. Bear in mind, you’ll still have yearly tax returns to contend with though.
All that said, as a Sole Trader you’re subject to unlimited liability, meaning that you’ll be personally liable for any of the debts the business runs up – that’s not the case if you’re a Limited Company, as I’ll explain later.
Elsewhere, Sole Traders often struggle to raise investment and borrow, which is something worth bearing in mind if you’re trying to take your start up to the next level.
The Limited Company structure
In contrast to operating as a Sole Trader, running your business as a Limited Company you’re granted with limited liability. Your maximum losses can only be equal to what you put into the company in the first place. A separate legal entity to the business, if your company goes bust your personal belongings won’t be touched.
Operating as a Limited Company you may be able to gain access to greater investment, as you can establish your own company credit rating against which to borrow money and issue shares as a way of raising funds. Banks, too, are generally more likely to lend to Limited Companies.
Finally (and probably most importantly) there’s also the potential for greater profitability, operating as a Limited Company is often more tax efficient when your business gets to a certain stage.
All things considered, going Limited brings with it a significant amount of paperwork – much more than you’ll be liable for as a Sole Trader.
To sum up then, as a rookie entrepreneur it’s probably best to start up as a Sole Trader, given all the paperwork and HMRC fuelled responsibility that’s involved with going Limited. The tax benefits only really come when you’re earning in excess of £25, 000 and given the increased burden, trading as a sole trader will spare the grief of the added paperwork and legal responsibilities.
Consider going Limited as you grow and plough more money into your business though, as it’ll help attract investors, free up funds and make your business look that little bit more professional.
This article was contributed by Mark James, a Brighton based Business and Finance Writer. He currently works in-house for Crunch, an online accounting firm for freelancers, contractors and small businesses.