One of the most asked questions; Should I set up a limited company or stay as a sole trader? A simple yet interesting question that impacts finances, taxes and legalities. In this article we'll cover the difference between sole traders and limited companies and give you the answer as to which one you should pick.
What is sole trader?
A sole trader is you; you operate as a self-employed business owner with no legal division between you and your business. You keep all the profits, but you also keep all the responsibility should something go wrong.
What are the advantages of being a sole trader?
Being a sole trader involves less admin, is a cheaper option, allows you more privacy and means you keep all the profits you make after paying tax.
What is a Limited company?
A limited company is legally separate from you, so you are not personally liable for the losses made by the business. Setting up a limited company is relatively simple and cost-effective, but you might need some help understanding the legal jargon.
What are the advantages of a limited company?
A limited company can portray a more professional status, protects your personal assets from the business liabilities and gives you a higher chance of getting funding into your business.
What should you choose?
Okay so that's all well and good (and I'm sure very exciting) but is that all there is to consider? No, it's not, what you really need to think about is your business goals, the way you structure your business (and I don't mean legally) massively impacts how much you enjoy being part of the business.
Yes, limiting your personal liability is great but have you considered if you really want to invest all your time and energy into growing a business, do you really want to work with big companies, do you want to take employees on and if you grow this massive, world beating company how do you get out when you're ready to take a back seat.
If you have large growth ambitions
If you have goals to grow a large business with employees and eventually look to getting investors in or selling your company, then having a limited company makes total sense.
There is however considerably more financial and tax administration required and so working with an accountant from the off makes sense.
If you want something to serve your life
If you are looking for a more flexible business that perhaps is serving your life and allowing you to work around caring responsibilities, but you don't envisage massive growth, taking on employees or looking at funding options then being a sole trader makes more sense.
When to speak to an accountant
If you're not sure about where you want to go with your business, it is super important that you look at the structure on a regular basis as it can be costly to convert from a sole trader to a limited company if you have a larger more established business further down the line.
All the above are the kind of things you need to think about and be talking to your accountant about because no business decision is ever just about the money. A great accountant will want to understand you and learn about your goals and your dreams for your business and not just talk about tax. If you can't have these kinds of important conversations with your accountant, find a better one.
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We help business people understand the differences between sole traders and limited
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