More questions answered at Startups On Sunday, Dave in Nottingham asks: “What is the difference between a Sole Trader and a Limited Company?”
There are many misconceptions about legal entities or business structure, how your business is set up will impact your personal as well as business assets, so getting it right is important.
Some people make the assumption that a Sole Trader is working alone, this is very often the case yet a Sole Trader can also employ staff or sub contract work. The term Sole refers to the liability of the Company, responsibility for things such as debt, assets etc. For example – a sole trader wins a large contract and starts to see rapid growth within the business putting strain on cash flow, the cash immediately available to spend. After a period of time if the cash flow issue is not addressed by maybe renegotiating invoice terms, the suppliers will put the business on stop, declining to fill any further orders. If the debt is still not paid they are likely to issue legal proceedings for settlement. The legal structure of this example means that not only are the business assets at risk but also your personal assets, car house etc. You are solely responsible for the debt in the business. Class 2 and 4 National Insurance contributions are still due in this structure. The advantages of being a sole trader is the simplicity in set up and access to HMRC’s simplified tax return system, more info here. This reduces the amount of time spent on administration and allows that time to be spent on promoting or delivering services and products. Of course keeping accurate records while all this is going on is paramount.
In contrast a Limited Company takes longer to set up, needs a director, has a regulated system for reporting full annual accounts, will need to be registered at Companies House and takes up a considerable amount of administrative hours to keep up to date. This legal structure differentiates between the director of the company and the company itself. If the business followed the same cash flow issue as the above example then, so long as the business could be shown to have been run responsibly, the directors personal assets would be protected, the company becomes liable for the debt. Other benefits of a Limited Company are assigning shareholders, benefits in kind and paying dividends. You will need to file a personal tax return at the end of the year, and the company will need to file a corporation tax return.
Additional information can be found here
Ultimately the business structure will depend on the type of business and how comfortable you are with risking personal assets or administrative procedures. If you are thinking of a limited company then may I recommend at least having a conversation with a qualified accountant, you’ll need to get the structure and articles of association right.
Another StartupsOnSunday question answered next week.