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Choosing a legal structure for your new business depends on the nature of your company. There are also pros and cons to both incorporating as a limited business and working as a sole trader.
In 2020, around 3.5 million UK businesses were trading as sole proprietors, compared to approximately 2 million active limited companies.
Here we’ll explain the difference between a sole trader and a limited company to help you make informed judgments about getting started with your new business concept.
Every company needs to have a legal structure, which could be:
Incorporating a business means that your company has a separate legal structure from you as an individual.
Your limited company is an entity in its own right, with its finances kept separate from your personal affairs.
The company owners are the shareholders, and the managers are the directors, all of whom must be registered with Companies House.
Many small businesses begin life as a sole proprietorship, which is generally the most straightforward option as it doesn’t require much work to set up.
Essentially, a sole trader is someone self-employed; who is the only owner of their business.
Given the simplicity of this structure, it’s easy to see why it’s the most popular way to run a business.
However, you will still need to register as a self-employed sole trader with HMRC and submit your tax returns!
There isn’t a catchall answer to deciding on the right way to set up your business, and there are several factors to consider.
Let’s run through some of the advantages and disadvantages to help clarify where the pinch points lie.
Some aspects of business are undoubtedly a little easier if you’re an officially registered company.
For example, buying a property through a limited company is usually more straightforward than proving your average income to apply for a sole trader mortgage.
Other benefits include:
You’ll also find wider tax allowances for limited businesses, so you might make a higher profit by taking advantage of tax deductibles.
On the flip side, registering a new limited business does mean more paperwork and ongoing compliance requirements.
Limited businesses are obliged to file annual accounts, of which some information is readily available in the public domain.
Therefore, you have less privacy than a sole trader who doesn’t have to disclose their financial affairs in the same way.
Setting up a new company as a sole trader is the faster option, with little paperwork aside from verifying your tax position with HMRC.
Owners aren’t bound by the fiduciary responsibilities of a limited company director, and therefore sole trader businesses typically cost less from an admin perspective.
Ultimately, the choice of business structure is yours, and it’s wise to seek professional advice about tax efficiencies and risk before making any long-term decisions.
Other factors include insurance costs and any client requirements – some sectors are far easier to break into if you have an official company registration number.
Get in touch with the Harper James Solicitors team for further information from their startup lawyers in the UK about the pros and cons of each trading style and independent advice about which option is optimal for you!
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