One of the first tasks you need to undertake while you form a company is deciding whether you will set up a limited company or be self-employed. If you opt for being self-employed, this can be as a sole trader or a partner in partnership.
The different business structures come with their own sets of advantages and disadvantages. Thus, it is vital to understand what each of them offers. Finding out the option that best suits you and your business is time-consuming and can have major ramifications over years to come. Thus, it is crucial to choose a business structure that best suits your situation.
Here are some of the aspects to remember while deciding on the business structure.
The taxation structure for the self-employed and the limited companies are different. The limited companies enjoy an entity separate from the shareholders’ and the directors’. The business and personal affairs of the self-employed individuals are treated as ‘one’ for tax reasons.
The limited companies pay Corporation Tax on annual profits while the company directors are taxed on the income that they draw from the company through an annual self-assessment procedure.
The self-employed individuals are taxed on profits they make every year through the process of self-assessment. The National Insurance Contributions get deducted annually or weekly, depending upon the amount of profit.
By running business as a limited company, you are likely to pay less personal tax as compared with the sole traders.
Limited companies remain separated from the owners. Everything from company bank account to ownership of assets as well as involvement in contracts and tenders is company business separated from the interest of the company’s shareholders.
Sole traders and their businesses are treated as a single entity for administrative and tax reasons.
Credibility and Business Structure
In some professions and industries, you will find it beneficial to trade through limited companies. If you offer professional services as a surveyor or consultant, the clients will expect to trade through a company. This may be a contractual need.
As you can guess from the name, if you operate a limited company, you remain protected if things go amiss. If no fraud has taken place, you will not be held personally liable for the financial losses incurred by your limited company.
The ones running business as self-employed do not get such protection from financial claims if something does not go right for business.
Finding funds is tough for all types of business in the present condition. As a limited company is distinct from the owners, it becomes easier for organisations to secure finance as compared with the sole traders.
As soon as an organisation is registered with the Companies House, the company name is protected by law. Nobody else can use that particular name or anything similar.
For the sole traders, there is a possibility that someone else will trade using the same name and you can do little about it. This will not just damage business but in several cases, may also need you to go through the time consuming and costly effort associated with changing the name of your business.
Costs and Administration
The limited companies need more of the business owners as compared to the self-employed. The limited company directors need to observe a few financial as well as statutory obligations. All the limited companies must get themselves registered with the Companies House. They must ensure that the registrar remains informed of all the changes in a given organisation, right from filing an Annual Return to copy of company accounts. However, this is far from being a trouble as most firms employ accountants to take care of accounting responsibilities and communications with the HMRC and Companies House.
The sole traders employ the service of accountants and bookkeepers to help them with the annual self-assessment returns.
There is no correct or incorrect business structure; just one that is suitable for your business situation. As soon as you understand the chief benefits of each option, it will be easy for you to form a company.
If you start out as a sole trader and then move on to form a limited company, there are options to do so.