You’ve put together your business plan, obtained funding and come up with an eye-catching name – but there’s another important thing to do before you launch your new business.
It may not be as fun as ordering headed stationery and attracting a following on social media, but you need to decide what kind of set-up is best for your business.
Difference Between Sole Trader or Limited Company
You might already have heard the terms ‘sole trader’ and ‘limited company’, and there’s also a third option called a business partnership. Here we explain what each means, and why they could be the right choice for your new venture.
Sole traders are self-employed and run their own business as an individual. It’s often thought you must work alone to be a sole trader but this isn’t the case. You can employ staff, but you are solely responsible for the business.
As a sole trader you do not have to register with Companies’ House but you do have to register with HM Revenue & Customs (HMRC) and register for self assessment in order to complete your tax returns. Once you have paid tax on your profits, you are entitled to keep the remainder. You need to keep a record of all business sales and expenses and pay National Insurance contributions as well as income tax.
You can trade under either your own name or a business name, but the name cannot contain terms such as ‘limited’ or ‘ltd’ or imply they are linked to national or local government. You are legally responsible for the business and so should have appropriate insurance.
There are benefits and disadvantages to operating as a limited company as opposed to a sole trader, so you should weigh up the options carefully. As a limited company, you must register with Companies’ House and appoint directors to run it. Registering online takes about 48 hours and costs £15, whereas a postal registration can take about 10 working days and costs £40. You can also use a same-day registration service but this can be expensive.
Once registered, you will be sent a Certificate of Incorporation to show that the company legally exists and has a company number. Limited companies must pay corporation tax on all profits and, depending on the nature of your business, this can be a better option than paying income tax. You will also have to decide whether to pay yourself a salary or dividends; both have their pros and cons but remember that paying yourself even a small salary can protect your entitlement to state benefits.
Whereas sole traders are personally responsible for any business debts, liability in a private company is limited to the shareholders, depending on the type of company it is.
Partnerships sit somewhere in the middle of the two options above. In principle, they are similar to a sole trader set-up, but they can have two or more partners. If you decide to be a limited partnership, all partners are liable for any debt. The other option is to become a limited liability partnership, which restricts each partner’s liability to what that partner has put into the business. If you chose this option, you will have to register with Companies House and put certain details on public record. If you run a business partnership you will also have to choose a nominated partner to manage the tax returns and keep business records, and all partners and the partnership must be individually registered with HMRC for self assessment.
We hope this information helps you decide which one will work best for you, but in the meantime if you have any questions or want any help please give us a shout – we’re here to help!