When you’re first starting out in business, it can feel like there are a thousand things you need to decide. And to be honest, there are! So many things to think about, and often not enough information to make an informed decision. One of the first, and possibly the most important, is how to structure your business. A small decision, but one that affects a lot of the next decisions you make. Like how you register your business, what insurances you take out, how much tax you pay, and even the kind of accounts you need to file. So, how do you decide what company structure is right for you?

What’s The Difference?

While there are a lot of different ways you could structure your company, for most people it boils down to two options – sole trader or limited company. So, it’s important you know the difference.

Sole Trader: A sole trader is essentially a self-employed person who is the only owner of their business. It’s the simplest type of business structure out there, and its often how small businesses start out. As a sole trader, you’re legally considered the same entity as the business, which means you’re responsible for all business assets and profits, as well as any debts. It’s really easy to set up as a sole trader, but you will still need to register with HMRC for tax purposes, since you’ll be paying tax on any profits over 1k per year.

Limited Company: A limited company can run in a lot of similar ways to a sole trader, except the business has its own legal identity. That means you as an individual are separate from the business, and aren’t liable for the debts or obligations of the business. Or rather, you have ‘limited liability’, so you can protect your own assets and finances if the business runs into problems. Limited companies need to be registered with Companies House, file annual accounts and reports, pay corporation tax and have a separate company bank account. So it’s quite a bit more paperwork! You can run a limited company even if you’re a one-man band – it’s just a structure thing.

Of course, like almost anything in life, there are pros and cons to each business structure, so it’s important to look carefully at the options before making your decision, and get advice if you need it.

The Pros and Cons of Being a Sole Trader

Being a sole trader is one of the simplest and easiest business structures you can choose, and it’s still one of the most popular structures for new start-ups. The main positives of being a sole trader include:

  • It’s easy to set up, with relatively little paperwork to do. There’s just an annual self-assessment tax return to fill in.
  • You have full control over the business, and you get to keep all of the profit (except the bit you pay to HMRC)
  • You have a lot more privacy as a sole trader – mainly because you don’t have to register your details with the Companies House database.
  • If you do decide you’d be better as a limited company (or other type of business) later on, it’s much easier to transition from sole trader. 

Of course, it’s not all sunshine and roses. There are some disadvantages to it too, like:

  • Because a sole trader is the business as far as the government is concerned, you as the business owner have unlimited liability. So, if anything goes wrong, like a customer sues you or the business goes into debt, all of it rests on your shoulders. You could even lose personal assets if things really go wrong.
  • Raising finance can be difficult. Banks and investors often prefer limited companies, so if you need funding to expand your business, you could struggle.
  • To be honest, tax rates for sole traders aren’t the best. Tax brackets tend to favour limited companies, and while this might not be much of an issue as a small business, if you get to a certain level of income, you could feel the pinch.
  • Some customers and suppliers might look at a sole trader and think your business is less established or credible. Some companies (usually very large ones) don’t like working with sole traders at all. Whether this affects you depends on what type of person your customer is.
  • Switching to being a limited company down the line isn’t all smooth sailing. For example, you may need to change the name of your insurances, banking and more, which can all take time.

The Pros and Cons of Being a Limited Company

Now that we’ve talked about sole traders, it’s time to look at limited companies. Let’s start with the positives:

  • Unlike a sole trader, registering as a limited company creates a legal distinction between the business owner and their business. That means your personal assets aren’t at risk at all, and if anything does go wrong, you only stand to lose what you’ve put in the company.
  • Once you’ve registered the company name with Companies House it’s yours. No one else is allowed to use it, and if they do you can take legal action. It’s not quite the same level of protection as trademarking, but it’s a lot more than a sole trader.

On the other side of the coin, some downsides to becoming a limited company include:

  • There’s a lot more work in setting up and running a limited company. You’ll have some new responsibilities, including something called a Directors Fiduciary Responsibility, which outlines what a limited company director has to do legally. You have to file one every year (known as a Confirmation Statement), along with your annual accounts.
  • These extra responsibilities can be time consuming, as well as costly if you forget about them. That’s why so many limited companies hire bookkeepers and accountants to help them manage it all.
  • Your information isn’t private. The details of all limited companies (and their directors) are listed on Companies House. All directors’ names, addresses and copies of your company accounts – all there for anyone to view. This is another level of transparency that you might not be ready for. There are some ways around it – like using a registered address service, but it does add another layer of admin for you.
  • Getting into the nitty gritty, there’s also a potential for you to be taxed twice. The company profits are taxed at the company level (through corporation tax), and again when distributed to shareholders as dividends.

Ultimately, it’s your choice which company structure works for you. But before you go ahead and start the process, make sure you understand what each one means, and how it might affect you. Speak to an expert, ask some questions and get advice from someone who knows the ins and outs of the system. At Bluebell Bookkeeping I’ve been working with businesses of all shapes and sizes for years now. While I now mainly work with limited companies, I have plenty of experience with sole traders, and am always happy to talk through the company structures and share the pros and cons for each. If you’d like some impartial advice on choosing a company structure, then I can help. Just get in touch with me and book your free consultation.