In the United Kingdom, there are two main types of business structures: sole trader and limited company. Both structures have their own set of advantages and disadvantages and the choice of which structure to use will depend on the specific circumstances of the business and the needs of the business owner. However, with a professional business start up accountant, you can often ease your worries and be helped through the decision process.
A sole trader is a business structure where the owner operates the business as an individual and is personally responsible for all aspects of the business, including debts and liabilities. The owner keeps all profits from the business but is also personally liable for any losses. Setting up a sole trader business is relatively straightforward and inexpensive.
A limited company, on the other hand, is a separate legal entity from its owners, the shareholders. The shareholders have limited liability, meaning that their personal assets are protected in the event of the company incurring debts or liabilities. The company is also responsible for paying corporation tax on its profits. Setting up a limited company is more complex and can be more expensive than setting up a sole trader business.
Here are some of the pros and cons of choosing each option:
Sole trader:
Pros:
- Simple and inexpensive to set up
- The owner has full control over the business
- The owner keeps all profits from the business
Cons:
- The owner is personally liable for all debts and liabilities of the business
- The owner may find it difficult to raise finance
- The owner may find it difficult to separate personal and business finances
- Business seen as smaller and less professional by some which may limit business growth
Limited company:
Pros:
- The shareholders have limited liability, which means that their personal assets are protected in the event of the company incurring debts or liabilities
- The company can raise finance more easily
- The company can provide tax advantages if planned properly
- Seen as bigger and more professional by some which opens more doors for business growth
Cons:
- More complex and more expensive to set up
- The shareholders have less control over the business if more than one
- The company is responsible for paying corporation tax on its profits
- A lot more paperwork/regulations which require more focus and control
It's worth noting that the taxes and regulations for both structures are subject to change, so it's always recommended to seek professional advice from a business start up specialist when deciding which structure to choose for your business.