Setting up a new business is a big step and there are many important decisions that need to be made from the start. One of the first is to decide whether the company should be registered as a sole trader or as a limited company. There are pros and cons to both business structures.
A Sole Trader
This type of business is set up and run by one person and there are no legal distinctions between the individual and the business.
The advantages of this type of company are:
- It requires fairly straightforward accounting, needing to submit an annual self-assessment tax return, with VAT and payroll returns as appropriate. The accountancy costs are less expensive than those of a limited company.
- There is no legal obligation to make accounts public.
- The business can be run according to the wishes of the owner.
The cons are:
- As there is no legal distinction between the owner and the business, the owner is wholly liable for any debts incurred and any assets may, therefore, be at risk. This tends to become more of an issue as the business expands and trading becomes naturally more of a gamble.
- There may be a higher tax burden.
- If the owner has a poor credit record, it will have an impact on the company.
A Limited Company
This type of business is owned by a group of shareholders and exists as a separate legal entity. This means that the owners are less likely to have to repay any debts incurred and can safeguard individual assets in the event of bankruptcy.
The advantages of this type of business are:
- The shareholders have no personal liability beyond the value of their individual shares, although the directors must obviously act within the confines of the law for this to hold true.
- The business appears professional and established and may benefit from an element of prestige.
- Private limited companies are usually easier to sell.
- It is possible to generate funds by issuing shares, and even floating it on the stock market
The disadvantages are:
- Less privacy. You will need to file your accounts at Companies House, where they may be inspected by any interested member of the public.
- Administrative costs will be higher as meetings need to be minuted and matters need to be in compliance with company law.
- The filing of accounts and tax returns usually need to be handled by a professional accountancy company, such as MCC Accountants.
For tailored advice about how to structure your business, please feel free to contact MCC Accountants who offer a range of professional accountancy services designed to meet the needs of all types of small businesses.
