Should Sole Traders Go Limited?

One of the first decisions you should make when deciding to start your own business is whether you should incorporate it as a limited company or operate as a sole trader. Both approaches have their benefits and drawbacks, and which structure you choose to adopt will depend on what is a higher priority for your business.

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Benefits:

Looks more professional

In the UK, incorporating your business with Companies House as a limited company adds to its credibility. Although you may only work for yourself, appearing as an incorporated legal entity can be helpful when trying to attract clients wary of sole traders, or ‘one-man-bands’. People are more likely to do business with an incorporated company with limited liability as it looks more professional than a sole trader. Clients and contractors may feel like there is extra security and legislation to protect them should something go wrong.

More funding opportunities

A lot of sole traders set themselves up as self-employed. But without a clear distinction between your personal and business funds, lenders may be reluctant to invest in your business or lend you money. If potential funders can see your business is a separate legal entity from your personal finances, they may be more likely to invest or offer you funding. Having a different business bank account can also make it easier for you to apply for mortgages and personal loans outside of the business.

Limited Liability protection

Sole traders and their businesses are the same from a legal standpoint. Meaning if a sole trader gets into debt, your creditors could go after your personal assets to recover the funds. The ‘limited’ in ‘limited company’ means that whatever financial difficulty a company may encounter, its effects won’t go further than the confines of that company. The director’s personal finances will, therefore, be safe, unless they have taken out personal guarantees on any loans. Many people consider this the main advantage of incorporating as a limited company; as long as there is no wrongdoing on the director’s behalf, they won’t be held personally liable for their company’s debts.

Drawbacks:

A lot more admin

With all the advantages and extra protection that limited companies provide, there is a considerable amount of additional administration in both setting up and day-to-day running.  You’ll have to pay corporation tax out of your profits, and potentially VAT. The extra accountancy work means it could be necessary to hire a professional accountant to deal with it all. Additional costs could be added depending on how much of your admin you choose to outsource. Doing the bulk of it yourself will save some money, but also means more work for you, and it may be better practice to hire a company secretary. There are also more setup fees; exact amounts depend on how quickly you want the process to take and how you choose to set up the company.

More scrutiny on you as a director

While sole traders can enjoy a level of privacy, if you set up as a limited company in the UK, your details will be publicly listed at Companies House. Once registering, all your company information: Business and service addresses, details of directors and shareholders, People of Significant Control (PSCs), and account details, all become public.

Before you can register as a director of the company, you should be aware of the restrictions: You can’t appoint someone who has previously been disqualified as a director, nor can you appoint individuals undergoing bankruptcy.

Less freedom

In addition to extra scrutiny from HM Revenue & Customs (HMRC), Companies House and the public, you have less freedom to operate than if you were a sole trader. You have to be a lot more responsible with your company’s finances, factoring in deductions that need to be made before taking money out. Registering a company name is a much more rigorous process when incorporating a limited company. The name must be unique enough, so you’re not mistakenly associated with another company.

Summary

While operating as a sole trader has its benefits, individuals should consider setting up as a limited company as one of the first big business decisions. Incorporating the business gives a more professional appearance, which can help attract clients and contractors, as well as when applying for funding and grants. Of course, limited liability protection can be a significant attraction, as this separates the director’s personal finances from any business debt. There are drawbacks to becoming a limited company, though. There is a lot more administrative work that needs completing, along with more scrutiny on you as a director and less freedom to operate how you please. You should consider which of these aspects are most important to you before you go ahead and decide on your approach.

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.

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