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When you start a business, one of the first decisions you need to make is the choice of structure. Does it make sense to operate as a sole trader, or will becoming a limited company work better for you? It's an important choice for many business people, freelancers and self-employed workers, and has implications for finance, tax, legal obligations and a raft of other considerations. It's worth taking a look at which of the two will best suit your particular enterprise, and working out the pros and cons for each.
Initially, many businesses begin as a sole trader, which is otherwise known as being self-employed. In spite of the name, a sole trader can hire workers if necessary, it's a quick way to get started and the administration is relatively simple. With regard to tax, visit HMRC's website and register your business. You must complete an annual self-assessment tax return and pay your tax and national insurance, so you'll need to keep track of your income and expenses, but you won't need to file annual accounts.
The main disadvantage is there is no distinction between you personally and your business in terms of assets and liabilities. In the event of debts mounting up, or the threat of legal action, your personal assets, such as your home or car, would be at risk. You are also limited to a personal pension, whereas company pensions can be far more generous with regard to benefits.
A major benefit of becoming a limited company is having limited liability protection. If for any reason your company gets into trouble, your personal assets will be ring-fenced and, except in certain specific cases, a company director cannot usually be held personally responsible for the actions of the company.
Company status gives an impression of stability, and whilst there's no guarantee of security, some contractors and suppliers prefer to deal with a company rather than a sole trader.
There is considerably more administration involved. Annual accounts will need to be prepared and, in addition, the director(s) and shareholder(s) have to declare the salary and dividends they take from the company on their personal tax returns. Accounts have to be prepared in accordance with accounting standards, filed at Companies House and kept up to date with changes of director, shareholder and any other necessary information. Minutes of board meetings, shareholder resolutions and extra returns will be needed to comply with regulations, and transparency and honesty is essential as they are open to public scrutiny. Ignorance of necessary procedures will not be excused if issues arise.
Whichever route you decide to go down, AMR Bookkeeping Solutions can save you time spent getting to grips with finances, smooth the transition to a limited company if you choose that option, and leave you to concentrate on getting your business up and running. We offer a no-obligation free consultation to discuss your business's bookkeeping requirements, so why not get your new enterprise off to the best possible start with advice from our expert team on budgeting, keeping track of your expenses and receipts, and cash flow projections among other things. It's always easier to get into good bookkeeping habits from the start, so get in touch – we're looking forward to working with you.