It’s that million dollar question!
You’ve got your big idea, you are buzzing with excitement about your new business and can’t wait to get started.
But when your friends say “I could never do that as I wouldn’t know where to start” it puts that first seed of doubt in your mind.
How do you start? How do you decide which company structure is right for you? And do you really understand all that it entails?
In today’s blog we look at the key differences between a sole trader and a limited company, and help you decide which of these is right for you.
If you are a sole trader, you are self-employed. You work for yourself and sell goods or services to other people or businesses, with the intention of making a profit.
You are personally responsible for your business finances. If you make a profit, then this is yours to keep once you’ve paid the tax man. But if you make a loss, then you are personally responsible for this too.
A limited company is a separate legal entity in its own right. You may own the company, but it’s the company itself which has responsibility for its finances, for paying tax and for making a profit or a loss. Your liability as owner is limited to the amount of money you have invested in the business.
The big difference between the two is that for a sole trader, everything the sole trader owns (including property) is up for grabs, if the bills are not paid and someone who you owe money to decides to take legal action against you.
The “limited liability” of a company means that you, as the owner, will not lose all your belongings and money if the business fails. You would only lose the amount of money you have paid into the company.
Do I have to decide immediately?
No, you don’t. In general, most small businesses begin as sole traders.
As the business grows, it will become more risky for the owner not to keep his or her finances separate from the business. The needs of customers, suppliers and employees will all require it to be treated on a more formal basis.
This is the point at which the business becomes incorporated. It becomes something in its own right, with its own identity and bank account.
However, some businesses may wish to become incorporated from the start.
So how should I decide?
There are three things to consider here and it is of course all a balance of weighing up the pros and cons, and applying these to your own personal situation.
Liability – thinking about how you feel about your exposure and the risks involved with putting your own personal assets on the line
Financial – thinking about the costs of admin vs potential tax savings
Credibility – a limited company will have more credibility in some circles.
For more information, including details of other business structures that may be suitable for you, pros and cons of each, and a list of questions to consider when deciding for yourself, download our free guide.
And for our other free guides, visit the home page
We talk in more detail over in our Facebook community about all of these topics so you can be better informed and make the right decisions when setting up in business.
If you’re not already part of our community, it’s entirely free and can be found here:
Liz & Doug are a husband and wife team who have been running successful micro businesses for 25 years. With backgrounds as a “big 4” chartered accountant and as consultants, both have worked for large companies with clients worldwide. They believe that with the right know-how and support, starting a business can be made easy (or certainly easier!)
The contents of this blog are for general information purposes only and are correct to the best of our knowledge at the time of going to press. You may wish to seek professional advice in relation to specific circumstances.