You have decided you want to start a business, but what form of business structure should you choose?
Choosing the right business structure is an important step in turning an idea into a business, and should be given careful consideration. There are a number of options to choose from but this article by Victoria McMurray, Senior Associate, MacRoberts LLP focusses on the two most common structures for new businesses, namely:
- sole trader
- limited company
Victoria covers what these structures are, while also highlighting the key considerations to help you decide which one is best for you and your business.
What is a sole trader?
A sole trader is a simple form of business structure where a business is owned and operated by a single individual, and there is no legal distinction between the owner and the business itself. Due to the nature of this structure, it is common for individuals operating under a sole trader to refer to themselves as self-employed.
What is a limited company?
A limited company is a business structure which has its own legal personality, separate from the owners (shareholders) and the managers (directors) of the company. Under such a structure, it is possible for one person to run the business acting as both the shareholder and director, with the business keeping its separate legal personality.
Why choose to be a sole trader?
One of the most attractive aspects of using the sole trader structure is that the process of setting up such a business is straight forward, requiring relatively little paperwork other than an annual self-assessment tax return to HMRC.
The greater level of privacy of a sole trader is another aspect that sees many individuals choose this over a limited company, with the details of those who set up a limited company being published on Companies House. However, it is important to highlight that you wouldn’t have complete anonymity as a sole trader if you wish to effectively market your business, having to put some personal details out into public.
While being a sole trader comes with the above perks, it also has its down sides. As a sole trader you would have unlimited liability meaning that if your business was to face financial difficulties, you would be personally liable as the business owner. This could result in the loss of personal assets in repaying debt.
The status of being a sole trader can also pose challenges for your business in its operations. Certain clients and customers may be influenced by the status of your company, with some perhaps having internal policies ruling out sole traders. Raising finance, by way of a loan or investment, may prove difficult with many banks and investors preferring limited companies.
From a tax perspective, being a sole trader would result in you not being able to benefit from certain tax reliefs that are available to a limited company.
Why set up a limited company?
Arguably the biggest benefit of operating your business as a limited company would be the limited liability, with the legal personality of the company separating you as the owner of the business and the business itself. If your business faced financial difficulties your personal assets would be safe, and only what you put into the business would be at risk.
In setting your business up as a limited company, you would also have some protection over the name of your company once it has been registered, something that is not offered to sole traders. This naming protection may be vital in building the brand and reputation of your business.
While operating as a limited company comes with the above benefits, there are additional steps you have to take in setting up the company. In addition to the extra paperwork required, you would also have to pay a small fee in incorporating the company.
A limited company also comes with further responsibilities in running your business. You would need to file an annual confirmation statement and annual company accounts which, in most instances, would require you to instruct an accountant to complete and ensure your finances are in order.
The level of privacy enjoyed by sole traders is not offered to limited companies, with such companies being listed on Companies House where the details of and information on your business could be accessed by the public.
Hopefully this article has given you a brief overview of what a sole trader and a limited company are, while also highlighting the key considerations of both business structures. In deciding what is best for you and your business, it is important to weigh up the differences identified above. We at the Women’s Business Centre would be delighted to help you decide which business structure is best for you, and to assist you with any other queries you may have, so please do not hesitate sign up and get in touch!