When starting your self-employment journey, choosing the right business structure is important. The majority of small businesses will either operate as a limited company or a sole trader. Each structure has its own advantages and disadvantages, and understanding which one is best for you is essential in ensuring your business succeeds.
At Hanley & Co. Accountants, this month’s blog looks at the difference between limited companies and sole traders. For more information, call us near Kendal on 01539 821869.
What is a Sole Trader?
A sole trader is a self-employed person who owns and operates their business as an individual. You have complete control over your business and financial decisions. From a legal standpoint, both you and the business have the same identity, so you have less protection over your personal assets.
Registering yourself as a sole trader is quick and simple. You only need to register for self-assessment tax.
What is a Limited Company?
A limited company is a separate legal entity from its owners. It is formed by registering as a limited company with Companies House. A limited company structure lets you own the company by holding shares in it, and offers limited liability protection for shareholders and directors, meaning personal assets are protected from business debts.
However, your company details are on public records, and there are more administrative and legal requirements. This includes annual accounts, corporation tax, PAYE etc.
What is the Impact on Your Personal Liability?
When operating as a limited company, your liability is significantly less. This is because you and the business are completely separate legal entities, should you run into financial issues.
However, as a sole trader, you have personal responsibility for debts incurred by your business, putting personal assets like your home and savings at risk.
When choosing to register your business, it is important to consider the level of financial risk you are prepared to face.
When Should You Consider a Limited Company?
Many startups will begin as sole traders. As your profits grow, becoming a limited company becomes more tax efficient. When your risks increase, limited companies offer more protection. Additionally, if you’re looking to grow, you have more financing opportunities.
Contact Us Today
No matter which business structure you choose, hiring an accountant is ideal in helping achieve your business goals. Having an accountant by your side means they can advise you and offer support.
If you require accounting advice, contact Hanley & Co. Accountants near Kendal. Serving across Cumbria, call us on 01539 821869. Alternatively, send us a message via our contact form and we will be in touch.
