If you’re looking to set up a new business then you’re in the right place!

I love helping entrepreneurs get all of the information that they need so they can start their businesses with everything setup correctly from the start, avoiding costly mistakes and delays in the journey.

However, before you jump right in and start trading, here are some of the most important things to consider when deciding whether to start business as a sole trader or limited company.

If you’re not careful, selecting the wrong business type could significantly impact your financial and legal responsibilities, tax liabilities and growth opportunities. There is however no reason why you cannot transfer your business from being a sole trader business into a limited company as you grow, so base your decision on your current circumstances rather than trying to second guess the future.

The Most Important Considerations

There is risk associated with every business, whether that is just the risk that they may not be able to cover their outgoings, or more significant risks such as how likely they are to be sued. Of course for some risks you are able to obtain insurance cover, but for others there is no insurance available.

You need to sit down and assess the risk profile of your business and how you would plan to reduce each risk. By the time you have completed your list it is likely you will have a good understanding of how risky it is for you to carry out your preferred profession.

In the eyes of the law you have a different legal liability depending upon whether you are a sole trader vs a limited company. As a sole trader you are personally responsible for all aspects of your business including debts and liabilities, and should it fail your personal assets are at risk.

Limited companies however, are viewed as a separate legal entity, its own person as such. This means that you would be personally protected should the business fail, as only the amount you have invested in the company is at risk.

The best decision for you…

If your risk profile of the business has shown it to be highly risky, or you simply wish to protect your personal assets from being open to risk, a limited company would be the best decision for you.

This is always an interesting topic that gets people talking! Spoiler alert you cannot avoid it, you can however plan for it.

As a sole trader you automatically pay income tax on all of your business profits via self-assessment. You are also liable for National Insurance Contributions class 2 & 4, with rates that vary based upon your profit.

A limited company pays corporation tax on its profits, however as an individual you are given more options for removing money from the company. You can choose to take a salary from the company, meaning that the profits of the company will be reduced before corporation tax is calculated, but you then pay tax on your salary via payroll. Or you can choose to take dividends from the profit retained within the company, which are taxed at a different rate to employment income.

The best decision for you…

If you would like the opportunity to plan for taxation, a limited company may well give you the flexibility that you need. That said it is highly advisable to seek guidance from an accountant or tax specialist to plan for how best to take money from the company as the rates regularly change so you cannot rely upon 1 plan.

Are you a fan filing deadlines and paperwork?

As a sole trader the admin burden is quite light. Keep good records of your income and expenditure to back up your annual self-assessment tax return and you are good to go.

Compare that to the requirements of a company that needs to file annual accounts, corporation tax returns, confirmation statements and also comply with all of the regulations set by Companies House and HMRC.

The best decision for you…

Whilst you shouldn’t base your decision solely on how good you are at administration (after all there are plenty of accountants who can help you!) it is worth considering whether you wish to be responsible for the administrative burdens of running a company. After all, if you don’t deal with it yourself, you’ll likely have to pay somebody else to.

When looking for a new product or service provider, do you find it more reassuring to deal with a company over an individual? Many customers and clients may feel reassurance when working with a company over an individual, so you may need to ascertain if this would make a difference to your ideal client base.

The best decision for you…

If it would assist you to attract not only clients but also potentially finance in the future, it could be worth considering trading through a limited company. 

Assuming that you will one day wish to exit from the business, you need to ensure that your business is formed in a saleable state. Selling a limited company is a much more straightforward transaction then trying to sell a clientele book from a sole trader. A limited company requires detailed accounting and is therefore easier to provide accounting records that back up a business valuation, unlike a sole trader whose business may well include a lot of expenses that could be deemed as more personal.

The best decision for you…

Depending upon your exit plan and your timescale to exit the business, a limited company could be a better option to structure your business. If however you are a good number of years from looking to exit, this point will be less relevant.