When it comes to developing your company, it is important to understand the differences between being a sole trader and a limited company. There are currently close to four million people in the UK who are acting as sole traders, which shows how popular this option is. But how do you know that this is the best option for your specific business?
Operating as a sole trader offers its benefits, not the least of which is the simplicity of trading. Being a sole trader makes it easier for many to keep track of their finances and to set aside money to pay their taxes. There are no setup costs associated with operating as a sole trader and there is only one self assessment tax return that has to be filed every year, which is one reason why many choose this option. There are benefits however, to operating as a limited company, which many sole traders fail to realize.
Sole traders are not currently recognized as registered businesses which means that any capital that is put into the business is left unprotected by certain laws. As a sole trader, you will not be protected should you incur business financial damage, which means that your personal property like your house or car could potentially be at risk. If your business fails and you have debts that you must settle, those personal assets could be taken to settle that debt. A limited company is protected which means that even if the company fails, personal assets are safe. Before you decide on what type of company you want to create, it’s worthwhile checking online with the official UK government company filing and registration page here. You can also use company formation agents to help you register your company.
Before choosing either a sole trader operation or a limited company, you have to understand how these differences could affect you in the future should your business go under. Many businesses will not see huge benefits of operating as a limited company until they hit a certain profit percentage each year. You should understand that there are fees and corporation taxes that are inflicted on limited companies which are not required when you operate as a sole trader.
When the fees for operating as a limited company are deducted each year, the owner often sees a very small paycheck. With sole trader operation, profits can be taken as a paycheck up to whatever amount you actually bring in through the business. There are of course, certain tax deductions that can be taken for limited companies that should also be considered. If you purchase uniforms or other business supplies and machinery, you can deduct those expenses from your taxes, which gives you a much better tax break each year. This is not the case with some sole traders.
Ultimately, it will come down to how much money your business makes each year and how expansive you plan for it to be. If you plan for your business to grow substantially over the course of the next few years, a limited company registration may be the best choice, simply because you will be able to deduct more expenses. If you want the simplicity that comes along with a sole trader company, that could also be an option. In either case, it is essential that you understand the differences in these company types before deciding which is best for your unique business.