One of the most crucial decisions you’ll have to make is whether your firm will function as a sole trader or as a limited company in the future.
The structure you choose can affect practically every element of your business, including how much tax you pay, how much money you can make, and even what happens if your firm runs into financial difficulties. What works for one business may not always work for another. As a result, it’s critical that you analyse the advantages and disadvantages of both options and make an informed selection.
What’s the difference?
A sole trader is a self-employed person who owns their business entirely and does not have a legal identity separate from the owner. A solo trader assumes whole responsibility. You must register as a sole trader with the government portal within three months of starting your firm.
A limited liability firm is one that is legally separate from its owner’s identity. It has a distinct corporate identity that must be registered with Companies House (for a modest price). As a result, there may be multiple owners or directors, each with limited responsibility – meaning their personal fortunes will be unaffected if the company fails financially.
Which is right for you?
It’s up to you how you run your company, however, here are some things to think about:
- Is your profit amount in the region of £30,000 or higher?
- Is this a business with a high potential for liability? For example, dealing with the public on a regular basis.
- Do you have another source of income?
It’s not a given but answering yes to any of these questions may indicate that forming a limited company is preferable than becoming a sole trader. This is because your income level shows that forming a corporation would be more tax efficient for you.
For many smaller businesses or self-employed tradespeople, being a sole trader offers a few financial advantages, but it also brings an increased level of risk. Becoming a limited company can protect owners from these risks by giving them limited liability, but it can also mean a lot more admin and fiduciary duties for the directors.