Starting Up

Sole trader or limited company: What is right for your start-up?

What to look out for

  • Red Red – Companies need to post Abbreviated Accounts at Companies House - which then become a public record
  • Amber Amber – Incorporation means that the liabilities of the business lie with the company, rather than the business owner
  • Green Green – There are potentially significant tax advantages of being a Limited Company

What offers the best protection, tax efficiency and long-term option for your start-up – sole trader or limited company?

I’m starting up a business: what are my choices?

Well, assuming that you are setting up by yourself, then your two main options are to set up as a limited company or as a sole trader.

What is a sole trader?

Sole trader is initially the most straightforward.  You don’t need to register at Companies House, for example, although if you haven’t got another job, you should register with HMRC for tax purposes. The HMRC website also gives some other helpful advice. As a sole trader you only pay income tax on your profits, so it probably won’t be essential to pay an accountant but make sure that you are recording all of your expenses properly from a tax perspective.  The tax treatment is reflective of the fact that as a sole trader you really are the business.  However, tax aside, this means that you are personally liable for any trade credit or debts incurred and any contracts that are entered into as part of the business are actually with yourself as an individual.  At the end of the day, this can put your own personal assets at increased risk.

What is a limited company?

A limited company is a separate legal entity with “limited liability”. When you enter a contract or liability for a company, that responsibility lies wholly with the company, meaning that there is no automatic recourse to you.  This separate entity extends also to the tax affairs of the company, although this does become a little more complicated and you will probably want to employ an accountant.

Does my accountant prepare my company tax return?

Your accountant will prepare company accounts for you and these will be the basis on which the company tax is assessed.  While your own personal tax will be entirely separate, if you are the sole owner of the company, then it makes sense to ensure that your accountant is acting for the company and you in tax affairs and takes a holistic and proactive approach.

Starting as a limited company may save time

If your intention is to grow the business to a reasonable size over time, then setting up as a company to start with can save having to incorporate and switch things around later, as well as beginning to establish a trading history right from the start.  A company structure allows you to offer shares to employees e.g. to tie in or incentivise individuals.  This separation also keeps your own finances apart, whereas the personal and business finances of a sole trader can easily get muddied. When it comes to a business sale, as a sole trader you are more likely to be seen as the business itself, potentially making a sale more complicated. That said, a limited company has more information in the public domain, as abbreviated accounts have to be registered at Companies House and become a matter of public record.  Whilst the information shown at Companies House is essentially limited to the balance sheet, even this enables readers to draw some conclusions, whether they are right or not!

The pros and cons of sole trader and limited company

A limited company offers you better personal protection, likely better tax efficiency and is probably a better long-term option, against the downsides of not being quite so easy to set up, probable accountant involvement with inherent increased cost and more information about the business being publicly available. Finally, don’t forget to have a look at the HMRC website I mentioned earlier.

Useful links

Asset finance: All the business owner needs to know

Business loans: How to bring cash into your business

Commercial property finance: Securing a commercial mortgage

Business funding: How to decide on the right type of finance

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