Starting a business is often a complex affair, with the main decision being whether to become a sole trader or set up as a limited company. There are advantages and disadvantages to both, although becoming a sole trader is much more straight forward. However, as a sole trader you will bear all the responsibility for the business, legally and financially. A limited company is a separate legal entity to the directors, limiting the liability if things go wrong.

Setting up a business as a sole trader means that you have full responsibility for all the risks and benefits of the business. This also means that you are responsible for business debts if anything goes wrong. As you are the business, you will be liable to pay any resulting losses or debts from the business, which could result in you losing your personal assets. Conversely, any profits you make after payment of tax are yours to keep. The administration of a sole trader is fairly straight forward, with one set of accounts to be submitted on an annual basis, along with a self assessment tax return. If you are liable to pay Value Added Tax, you will be required to submit a VAT return. If you have employees you will operate a PAYE scheme and a payroll. As the administration of a sole trader is less complex than a limited company you may find accounting costs a little lower.

As a sole trader you can run your business as you wish, with no requirement to make information available to the public. However, as a business grows the sole trader may find that they have increased exposure to the possibility of risk, which could adversely affect personal assets. The tax paid by a sole trader is significantly higher than a limited company. Expenses and tax reliefs are deducted from profits of the business to leave the net profit. Tax is paid at the same rates as an employee. A sole trader may find that the business credit rating is affected by their personal credit rating, which could make it difficult to obtain business finance. It is often much harder for a sole trader to raise business finance, as a fairly new business may be seen as less able to repay loans.

A limited company is owned by its shareholders and has a separate legal entity from the company owners. This limits the liability of shareholders for company debts, protecting personal assets. Personal liability is typically restricted to the share amount of the share holders. Business finance is usually much easier to obtain for a limited company, as creditors and investors know that the company is legally regulated and registered, presenting a professional and trustworthy image to the world. Raising business finance is also much easier as shares in the business can be sold in order to raise investment capital. The investor buys shares in a business in return for a share of the profits, known as a dividend.
A limited company doesn’t have the freedom to act as they wish or keep all business information private. Some information has to be registered with Companies House, like the company’s annual accounts which are free to be inspected by members of the public. Administration expenses of a company are higher, as company law and resulting administration is far more complex than that of a sole trader.

There are many advantages and disadvantages of starting a limited business or becoming a sole trader. It is advisable to consult a professional so that you can make an informed decision based on the facts of your intended business.

The Accountancy Partnership

We are a national firm of accountants that specialise in small and medium sized businesses. We have been trading since 2006 and have more than 1,000 clients across many different industries and areas of the UK.

Our staff has a wealth of experience and qualifications from the major accountancy and tax associations such as ACCA, AAT, ICPA, IFA, and FTA.

Our clients receive many benefits including:

• Unlimited help and advice throughout the year — We offer our clients unlimited ongoing support for their business. We often find that new clients have lots of questions about running a business and about how the tax system works. We have heard every possible question many times before and therefore can offer new clients the very best advice.
• Free representation in the event of a HMRC investigation — If one of our clients is selected for a HMRC investigation then we will offer representation at no additional cost. We fight our client’s corner and ensure that our clients do not pay a penny more than necessary on the conclusion of the investigation.
• Dedicated Accountant — Our clients have their own dedicated accountant in which they can contact anytime. We feel this is important because it means our accountants can get to know their clients and build good relationships. All our accountants work from our main office and we never outsource work.
• Recommendations — With every piece of work we carry out for clients we look for recommendations that can be made. These recommendations can be anything from structuring the business in the most tax efficient way to recommending an insurance quote to reduce costs for clients.
• Free business guides — When a new client joins us we send them a free business guide. These guides outline in simple terms how the tax system works along with key dates and deadlines. Most clients find the guides to be extremely useful.
• Financial advice — We have a very reputable financial advisor who helps our clients to structure their finances in a way that best suits their needs. We always look out for circumstances where we think clients can benefit from financial advice and add it to their recommendations.

Please click here for a quotation for your business. Please also feel free to contact us if you have any questions or would like further information; 0800 0430 007, info@theaccountancy.co.uk.

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Disclaimer: The information contained in these articles is of a general nature and no assurance of accuracy can be given. It is not a substitute for specific professional advice in your own circumstances. No action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a consequence of the material can be accepted by the authors or the firm.