One of the first decisions that you need to make when you decide to start your own business, is whether to be self-employed or trade through a Limited Company and there is a lot to think about. It is important you understand what it means to set up a limited company and whether that is the right thing for you and your business
There are both advantages and disadvantages to being a sole trader, in comparison to running a limited company. Don’t be swayed by people telling you that you have to have a limited company to run a business or that a limited company is more tax efficient than being a sole trader. If you are not sure that running a limited company is for you at this time, then it is possible to start your business off as a sole trader, and then turn your business into a limited company at a later date.
The legal structure you choose will have an impact on important areas of your business, such as how much tax you pay, what paperwork you need to fill out, the legal responsibilities of being a company director and the level of risk to your personal assets.
Although for some people, it will be the right choice, it is really important to do your own homework and come to an informed decision yourself. It may be worthwhile chatting it through with an accountant before you make the decision.
Here are some things to consider:
- The costs associated with being a limited company rather than a sole trader will need to be lower than your profit to make it worth your while. As a sole trader you pay tax personally on all the profit you make. It’s generally understood that if you earn up to £30,000 you’re better off staying as a sole trader. When you start to take in more than that annually, it’s probably time to think about whether to become a limited company.
- As a limited company you’re not personally liable if your business makes a loss. We would always encourage having separate accounts to keep your personal and business finances sperate even if you remain as a sole trader. Also setting up a new account for your limited company, rather than using the one you were using as a sole trader will help avoid any potential tax issues.
- If you’re a limited company, you pay corporation tax on any profits you make – and you need to do this before you take any dividends.
- Depending on the nature of your business and the direction you want to take it in you may need to bring in other directors or beneficial owners which you can’t do as a sole trader.
- Being a limited company can improve reputation and professionalism amongst clients and suppliers.
- When you become a limited company you can protect your business name by registering it with Companies House meaning no other company can use it.
It is also worth thinking about the extra time and effort involved with admin tasks and bookkeeping. Changing from sole trader to limited company can be a tough thing to get your head around on your own but if you need any advice on this, we would be happy to help.