Should I be a sole trader or limited company?

Forming your company – should you start as a Sole Trader or Limited Company?

When it comes to creating your own business, there are numerous decisions to be made. Thankfully, when starting an Auditel Business, you’re following a ‘tried and tested’ pathway to success, where there is firm guidance and structure around all the decisions you’ll need to make. That said, you still do have far more flexibility in how you run your business than is often the case in a franchised business.

The company formation decision for a stand-alone business

Putting starting a franchise to one side for a moment, one of the first decisions to make at the outset of setting up any venture is whether to operate as a sole trader or a limited company. This decision carries significant legal, financial and operational ramifications, making it imperative for aspiring business owners to assess their options before embarking on their journey.

As a sole trader, your business operates under your name, assuming full legal responsibility for the management and finances of your company. Legally, there is no distinction between you and your business, meaning that you will bear all personal liability for any debts incurred by your company. Being a sole trader offers simplicity and autonomy, however it also exposes the entrepreneurs’ personal assets to financial risk, thus making it a potentially risky route to go down.

Establishing a limited company involves forming a separate legal entity that is distinct from the owner or its shareholders. Through being a limited company, the business owner can shield their personal assets from business liabilities, hence mitigating financial risk and giving a layer of protection in the event of legal disputes or bankruptcy. Having limited liability also increases the credibility of a business towards investors, creditors or potential partners, thereby facilitating access to capital and fostering growth opportunities.  With a few additional legal reporting and accounting requirements therefore, you will face slightly higher operating costs in respect of accountancy fees, but these are quite frankly marginal.

Impact of Tax on a sole trader or limited company

In terms of business tax payments, sole traders and limited companies come with significant implications for the financial well-being of the owner. As a sole trader, business owners are subject to income tax on profits generated by their business activities, the rates being determined by their personal tax bracket.

Limited companies’ profits are subject to corporation tax, which are set at a flat rate by the government. Initially, this may seem disadvantageous, however limited companies offer larger flexibility in tax planning as well as allowing owners to optimise their tax liabilities through strategies such as dividend payments, expense deductions and pension contributions.

Beyond the legal and financial considerations, entrepreneurs should also consider the long-term aspirations of their business when deciding whether to be a sole trader or limited company. Limited companies offer greater scalability and flexibility for facilitating equity investments and merger acquisitions. Furthermore, the corporate structure of limited companies enables easier transfer of ownership alongside succession planning, therefore enhancing the sustainability and longevity of the business.

Overall, the decision to operate as a sole trader or limited company is a vital choice that commands careful deliberation of various factors. Sole trader status offers autonomy, however limited companies provide liability protection, growth opportunities and tax advantages. Ultimately, entrepreneurs must assess their own circumstances, long-term objectives and risk tolerance to decide on the most appropriate structure for their new business.

So how do Auditel Partners normally set up?

Whilst you should seek advice from an Accountant in starting any business, ultimately almost everyone that starts an Auditel Business these days does so as a Limited Company. Whilst you would be engaging with prospective clients under the Auditel brand, contracts for example would still be directly in your business name e.g. ‘Smith Consulting Ltd’ (Licensed Partner of Auditel (U.K.) Limited).

As you are required also to register an Auditel business for VAT from the outset too, not least to reclaim the VAT you will pay on your Initial Fee, this is another good reason to run as a Limited Company.  Some have started as a sole trader and then upgraded to a limited company later, this is also straightforward, but more work than just starting out fron the outset with a limited company.

When applying for bank funding, in the form of a business loan, banks these days often require that your limited company is formed in which the loan will be applied for. The process of registering for a Limited Company is however very quick and can be made on the Companies House website for a fee of around £13.  Auditel would give guidance around choosing a name.  Find out more about starting an Auditel business, speak to the Partner Recruitment Team today.

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