Establishing a business involves a lot of thought and consideration. One of the main decisions is the one regarding the legal structure of the company. After making this weighty decision, you may be able to watch your business grow. Nothing beats this sense of achievement.
Obviously, it is important to get acquainted with the elements that feature each structure, and the aspects that distinguish the two.
This decision has implications for legal, tax and financial liabilities. It’s also crucial for the amount of paperwork you’ll have to make, and the way in which your peers will perceive you. Of course, we couldn’t say that there is a straightforward answer that applies in all scenarios. Different legal structures are meant to fit distinct situations. Let’s find out more!
What Is a Sole Trader?
Firstly, freelancers who wish to embrace a simple approach might consider working as sole traders. This is a rather uncomplicated decision that will enable you to concentrate on getting work done at the highest standard.
In order to function as a sole trader, you need to contact HMRC so that you can register for self-assessment. This could be easily done online. You are expected to enter your yearly earnings. Afterward, the system calculates the taxes you must pay.
Sole proprietorship represents a company owned by a single individual. He/she has ultimate control of the way in which it operates. He/she owns the assets generated by the company and the profit it produces. Naturally, their accounting requirements are less cumbersome than in the case of a limited company.
Sole Trader Pros
·Total control – Probably the most noteworthy advantage is that, as a sole trader, you maintain ultimate control of your business. You can run it how you wish without the interference of others.
·Private data –As a sole trader, your information remains private, and this is not the case with limited companies.
·Profit retention –Sole traders keep all the profits generated by their companies.
·Personal approach –Sole traders can provide services that have a personal touch. This could make them more attractive to locals.
Sole Trader Cons
·Decision making – Since you are in charge of making every decision, the failure or success of the company depends entirely on you.
·Liability – A sole trader isn’t conveyed as a separate entity by the law. So, this makes them subject to unlimited liability. In other words, if your business gets into debt, you, as the business owner, will be held liable. In worst case scenario, this could jeopardize all the possessions both in and outside the firm.
·Funding – Sole traders often encounter difficulties when it comes to raising funds for their businesses. This could prevent them from further developing in the future.
·Reverse economies of scale – As a sole trader, you cannot benefit from the advantage of economies of scale in the way in which a limited company would. On that note, this could mean charging higher prices for the services offered in order to make up for the costs.
What Is a Limited Company?
As the name implies, a limited company is a firm whose liability is limited. To expand, a limited company enables the entrepreneur to maintain their personal assets separate from the business itself.
Additionally, other people who invested in the company are held liable for business debt up to the amount they invested. In essence, a limited company is conveyed as an entity itself, which could be subject to legal action.
Limited Company Pros
·Restricted Liability – A limited company is legally different from its owners and shareholders. If things go wrong, this provides you with protection from personal liability.
·Ownership and control – If we were to discuss private limited companies, the directors are the primary shareholders of the firm. That provides them with control when it comes to decision making.
·Taxation advantages – Generally, a limited company is taxed based on the profit it delivers (at a rate of 21 per cent). The UK government plans are on diminishing this to 18 per cent by April 2020. Plus, a limited company isn’t subject to greater (personal tax rates), which are placed on sole traders (these could reach 40 per cent). As the director of a limited company, you are classified as an employee. As a result, you are required to pay the Class 1of NICs on your earnings.
·Pension funds – Executive employee pension funds are valid business expenses in each limited company. This provides a tax advantage over the sole trader.
·Shareholding – A limited company may issue various types of shares. In other words, you could easily sell or transfer shares. The ownership of a limited company is also easy to transfer if you intend on leaving the business or retiring.
·Professional prestige – Establishing a limited company illustrates a professional reputation. In fact, some agencies and contractors prefer working with such companies due to the legal protection offered by a limited company. This could be extremely beneficial, especially when it comes to raising funds.
Limited Company Cons
·Costly set up – A limited company is more expensive to set up, in comparison with a sole trader.
·Complex administration –A limited company is a complex structure. As a result, the regulatory implications are rather intricate and time-consuming.
·Accountancy costs – A limited company depends on the services of a professional accountant, which involves other costs.
·Separate legal entity – In the case of solo traders, the owners can make withdrawals without any tax implications. However, this doesn’t apply in the case of a limited company. Withdrawing money could be quite difficult.
·Director’s responsibilities – As a director, one has the responsibility of delivering documents to the Companies House. Failing to do so would be conveyed as a criminal charge, in addition to late filing penalties.
In conclusion, it is compulsory to carefully analyze the advantages and disadvantages of each business structure. If you are insecure about the best path for your business, you should discuss with a specialist that would explain each structure in detail.
Evaluate your circumstances and the way in which you expect your company to evolve, and you’ll be on the right path. Rebecca works for Online Accountant, the first online accountancy practice in Ireland. If you are just starting up they can help with your company setup and registration.