When it comes to the time to take that final step in making your business idea a reality, as an entrepreneur you will have to register your business. This is an important decision for your company and each type of business you can choose to register as, has specific advantages and disadvantages.
The most common types of businesses for start-ups involve registering as a sole trader or a limited company. Each type will benefit a certain kind of entrepreneur, and should be a prominent and well thought out feature of their business plan. Here we will look at an overview of the cost and benefits of each business type and which would best suit your business needs.
The benefits and drawbacks of being a sole trader
A sole trader is the most common business type in the UK. As its name suggests, a sole trader is the single owner of the business. This means a business owner would be entitled to keep all profits after tax. One of the reasons why registering as a sole trader is so popular is the fact it is easy to set up and there is little paperwork in doing so. As the sole trader themselves are the owner of their business, they do not need to open a business bank account and submit a self-assessment tax return at the end of the tax year.
With every positive, there are what some consider disadvantages for registering as a sole trader however. The fact that you are the sole owner of your business also means that they themselves have unlimited liability. As your business is not seen as a separate entity by UK law, if your business goes into debt you are personally liable, and your personal assets are not protected. It is also important to note that there is nothing stopping someone else registering a limited company in your chosen trading name.
Will registering as a limited company benefit my business?
As a limited company, you are registering your business as a separate legal entity and its shareholders are liable for any debts. As such, in the unfortunate event the business was to incur any debts, as the business owner your personal assets will not be negatively impacted. Your limited company allows for future growth with the ability to bring in other shareholders and directors into the business and expand to better compete with rivals. In addition, once you’ve registered your business as a limited company, it is exclusive to you and no one else can use it.
As a separate entity, there are strict legal requirements one must follow as a limited company. With this comes the increase in the paperwork required to register and the added responsibility to run. Your limited company must prepare annual accounts, known as statutory accounts, from the company’s records at the end of each financial year which will also require an accountant.
In addition, the directors must also follow what is called the ‘Director’s Fiduciary Responsibilities’ which outlines what limited company directors must abide by legally. A limited company must also have its details made public via the ‘Companies House’, which is not the case for a sole trader.
Whether you are registering as a sole trader or a limited company, there will be advantages and disadvantages to both. The best piece of advice to follow is to decide as early as possible which one you would like your business to register as, especially since switching from either can be a tricky and laborious process.
The best place to start is to construct a detailed and thorough business plan to lay out your business’s goals. If you would like help with putting together your plan, get in touch today! Contact us online using the form on the right or call 01604 420 420.