Choosing what type of business you want to run is a difficult stepping stone in the early days of setting up shop. Should you just be a sole trader or set up a limited company?
Here are some benefits to incorporating and setting up a limited company over being a sole trader.
Financial separation
One of the main reasons why people incorporate their companies as opposed to setting up as a sole trader is because of the limited liability. This means that you’re a separate entity from your business so if that goes down or owes debts, you personally won’t be liable for more than the shares you’ve invested.
If you’re a sole trader, your personal assets like your house or car can be seized to pay any debts your business owes.
Staying power
If you work as a sole trader, the business is down to you alone. With a corporation, the business can potentially live on even if one or more shareholders die, become ill or decide to leave the business. The ownership may change but the business can still live on.
Easier to sell
If the time should come that you decide to sell the business, this is easier if it’s a limited company than a sole trader because it’s a separate entity to you.
More credibility
Sometimes limited companies are perceived to have more credibility than sole traders. Some businesses or suppliers will even avoid sole traders because companies are associated more with trust and security.
Protect your name
When you set up a limited company you have to register with Companies House. This means that your name is protected and that no one else can register it. Even a name that’s too similar to your own may not be allowed.
Get finance
If you’re looking for a business loan, lenders will usually look more favourably on incorporated companies than they do on sole traders because they’re taken more seriously and are perceived as less of a risk.
Another way companies can get finance is to sell shares. These can be offered to existing shareholders or new investors but can only really be done through an incorporated company.
The downsides
In the interests of balance, here are some downsides to incorporating your company. Some people might find it more beneficial to remain as a sole trader. This will be determined by your individual circumstances.
More paperwork
You’ll have to go through two lots of tax return, one for yourself and one of the company. An incorporated company will have to pay Corporation Tax on profits and any shares you receive will be subject to Income Tax and National Insurance.
As well as keeping records for tax returns, you may also have to deal with VAT returns if you meet the threshold. You’ll also have to keep records of shareholder meetings and agreements.
More expensive
In order to register a company, you’ll need to pay a fee. As you’ll have to produce two tax returns, fees for accountancy services are naturally higher so you’ll have to bear this cost in mind if you’re looking to upgrade from being a sole trader to having a limited company.
Closing a company may be more difficult
A limited company with shareholders is a more complicated affair than someone just working as a sole trader. A company will need to be dissolved and you’ll need to apply to strike it off from the Companies House register. Everyone who owns shares has to agree and once forms are signed, it will take a few months for the company to be formally closed.
You’ll also need to tell HMRC your company has stopped employing people and file a final tax Company Tax Return. You might also need to pay Capital Gains Tax on personal profits.
Should you start a limited company or become a sole trader?
If you’re looking for stability, credibility and financial security, then incorporating your company is probably the way to go. If you’re not at that stage yet or the associated costs are a bit off-putting, then remaining as a sole trader could work more for you.
If you’re unsure about which option is right for you, your accountant can help guide and advice you. Don’t have an accountant yet? You can grab a quick quote from us here.