The start of your journey: limited company, sole trader or partnership?
One of the first decisions you need to make is whether you’re going to operate as a sole trader or private limited company. Or if there are two or more of you, a partnership?
Limited Company
Setting up as a private limited company which is incorporated and registered at Companies House is a popular option. A limited company is treated as separate from the owners and officers of the company and is seen as a separate legal entity.
Like a person, the company is responsible for its own debts and liabilities. This is clearly an advantage to you as the owner (shareholder) of the company. It means that your home or personal wealth will not normally be capable of being attacked by creditors. Your risk as a shareholder will be the nominal value of the shares that you hold which can be as little as 1p!
On the flip side, the company, not you as a shareholder, owns the assets and profit. Therefore, a limited company should have its own bank account and any assets including cash should not be treated as belonging to you. The Company will need to declare a dividend but only if there are sufficient profits, for you to be able to benefit from the company.
Your limited company will also have tax efficient arrangements and reliefs on which you’ll need to take professional advice from your accountant or tax advisor.
Your responsibilities
Limited company shareholders and officers have very specific responsibilities and are under a duty to adhere to proper corporate governance or face fines and prosecution. The Companies Act 2006 and the company’s articles (rules of the company) pretty much set out the rules. But the relevant legislation and regulations are extensive and at times complex and it is your responsibility to make sure you know what they are and that you are compliant.
What’s more, due to the limited liability nature of a limited company a lot of information about your business has to be made available to the public to enable creditors and customers to know who they’re dealing with. This will include annual accounts, details of the shareholders and directors, what legal charges the company has and the articles / set of rules the company must be run by.
Day to day responsibilities
You MUST include your company’s name on all documentation, publicity and letters.
On business letters, business cards, order forms and websites, you must state:
- the company’s registered number
- its registered office address
- where the company is registered (England and Wales, Scotland or Northern Ireland)
- the fact that it’s a limited company.
Sole trader
An alternative to running your business as a limited company is to operate as a sole trader.
Can a sole trader have employees?
A sole trader is you, on your own, operating as you and it is you who is are liable for all claims and debts. In reality, you don’t have to be on your own and you can have employees (you need to register with HMRC as an employer and of course like any business you will have employer duties) but you are the only owner of the business.
You will have to file a self-assessment tax return each year and you’re liable to pay income tax and national insurance contributions on all taxable income.
Clearly, having unlimited liability is the obvious downside of being a sole trader. The upside is that you don’t have as much regulatory compliance to deal with and it’s easy and inexpensive to start up. You’ll also have full control over the business and it’s you who benefits from ownership of the assets of the business and of course the profits (after tax etc.).
Take advice
There are risks in any business but with the right information and advice you can manage those risks. In my next blog, we’ll take a look at some of the pros and cons of setting up a partnership.
Whatever route you decide to take, it is important to get it right from the outset and if you don’t, that can mean complications and or expenditure later on. It is therefore important to take professional advice on what is the appropriate vehicle for you and your business.