We want to make it as simple as possible so that our clients can make an informed and ultimately the right decision for themselves and their businesses.
So let’s get into it…
What is a Sole Trader?
Let’s put it simply, a sole trader is when you are considered the same as your business – you are your business some would say. This basically means you are a self-employed person who is the main owner of your business.
What does this mean for you? It means:
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Only you can own and control your business
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If your business has any losses or debts, you are personally liable
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You get to keep all profits after tax
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You can hire members of staff if you choose to
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You employ and pay yourself and any other members of staff you choose to take on
What are the advantages of being a Sole Trader?
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Easy to register
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You make all the decisions
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Less admin involved
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You get 100% of the profits (unless you hire members of staff & need to pay them)
What about the disadvantages?
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You are liable for your business’ debt and your personal assets can be used to cover this
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You are fully responsible for your business
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You can only raise limited finance – you can fund your business with savings or receive money from friends or family or potentially a bank loan (if your plans are convincing enough!)
How do you register as a Sole Trader?
Registering as a sole trader is relatively easy, you just need to tell HMRC that you will be paying tax through Self-Assessment, this is done through the government website (linked below!) – it’s simple in comparison to a Limited Company.
https://www.gov.uk/register-for-self-assessment
What is a Limited Company?
A limited company is where a company is legally separated from its owners – it’s a separate entity itself, unlike being a sole trader.
Limited companies are usually run by multiple people – but it’s not a legal requirement.
There are two types of Limited Companies:
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Limited by Shares (companies that make a profit)
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Limited by Guarantee (companies that are not for profit)
What are the advantages of a Limited Company?
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Losses and debts aren’t personal! If your business has losses or debts, it’s not personally your responsibility (your personal assets are protected)
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More tax-efficient (you can pay yourself however you like)
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You won’t be personally sued, as your company is separate from yourself (the company may be sued but you won’t be)
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It’s easier to leave the company, limited companies offer a ‘clean break’ in comparison to other business models
What are the disadvantages?
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Less privacy, registered addresses and some financial figures will be posted on company’s house and will be visible to the public
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You must prepare annual accounts
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Less input, strategy and planning will have to be discussed with all owners of the company
More financial admin – you will need to:
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File corporation tax returns
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Comply with making tax digital
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Complete annual accounts
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Each director/owner will need to file their own self-assessment tax return
How do you register as a Limited Company?
Registering a Limited Company has a few more steps than registering as a sole trader, but if a Limited Company is right for you, don’t be put off – it’s essential you make the right decision for your business!
The GOV.UK site (linked below) goes through each step you will need to complete to register your limited company.
https://www.gov.uk/set-up-limited-company
Ultimately, whichever route you decide to take, you will most likely face some challenges, if you still feel like you need more advice, we recommend chatting to an accountant that can point you in the right direction and answer any other questions you have!
References:
https://www.gov.uk/set-up-a-social-enterprise
https://www.gov.uk/limited-company-formation
https://www.gov.uk/set-up-sole-trader
