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When you’re first setting up a new business, one important decision is whether you incorporate your company or do business as a sole trader. It’s crucial to understand the disadvantages and advantages of being a sole trader – because, while it might be the easiest option, it’s not always the right path for you.
In this guide, the Harper James Solicitors team explains how both trading styles work, and why sole trading is the most popular choice for start-up businesses in the UK.
For more information about registering as a self-employed sole trader or for independent advice to help you evaluate the pros and cons, please get in touch with our lawyers for startups!
When working as a sole trader, you are a self-employed person carrying on an individual business as the only owner.
Here are its primary advantages:
Registering a limited company takes time. You’ll need to plan for the legal responsibilities of a directorship and deal with regulations around:
But the good news is that the Companies Act rules don’t bind sole traders like they do with limited companies; meaning there’s substantially less admin involved in setting up your new business as a sole trader.
The basics involve registering as a self-employed person with HMRC and filing your annual self-assessment tax return, saving a great deal of paperwork!
Sole traders own all their businesses. You can draw from your profits at any time and build your business as you see fit.
Provided you declare those deductions on your tax return, you have the freedom to manage your income as you wish, without needing to produce dividend vouchers or pay yourself a salary through a payroll system.
However, it’s wise to seek professional advice when you get started to ensure you’ve got a handle on your cash flow planning and tax liabilities.
Privacy and risk are critical considerations – with very different factors depending on which trading style you choose.
One option to counteract that risk when working as a sole trader is to look at insurances, such as unlimited liability coverage or long-term illness coverage. An excellent insurance product can be a good way of bringing your risks as a sole trader down to being in line with those of limited company owners.
While we’ve explored some of the distinct plus points, it’s essential to recognise some disadvantages of sole trader status.
A key consideration is professionalism. New businesses may find that incorporating a company through Companies House lends credibility to their new venture – a decisive factor if you’re looking for investment or lending!
Business owners buying a property through a limited company tend to secure better mortgage rates, since lenders can easily verify their turnover and profit margins through publicly filed accounting information.
Suppose you feel torn between the ease of working as a sole trader and the security of incorporating a business. In that case, it’s crucial to seek professional advice to ensure you make the right choice.
As you turn your business plans into reality, we can help protect your business by ensuring you understand the commitments of the contracts you enter into.
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We mainly work remotely, so we can work with you wherever you are. But we can arrange face-to-face meeting at our offices or a location of your choosing.