Starting a new business is a thrilling - and challenging - experience. Initially, you’ll likely devote all your time and energy into perfecting your product or service, setting up shop and chasing sales. As your business starts to grow, you’ll reach a point where the inevitable occurs: it’s time to register with HMRC.
If those words fill you with dread, don’t panic. Firstly, you only need to register as self-employed once your sales surpass the £1000 annual expense allowance. If your earnings are below this threshold, HMRC don’t want (or need) to know about it. You’re free to carry on as normal (which usually means late nights and early starts for even the most lowkey entrepreneur).
Once your annual takings pass the £1k mark, though, it’s time to register online.
You might be wondering which legal category your business belongs to. Whether you’re a freelancer, contractor or business owner, there are two main types of legal structures you should consider:
Whichever option you choose, it won’t affect the service you provide. What it will affect is how you file your taxes, what allowance you’re entitled to, and how you legally operate. In this article, we’ll provide an overview of each option to help you make the best choice for your business.
1. Sole Trader
Sole traders are self-employed. You alone are legally responsible for your business. It doesn’t mean you can’t rope in an extra pair of hands when things get busy. What it does mean is that you shoulder full responsibility for all decisions, profits and losses. So no splitting the bill (or the tip, either)!
Who can be a Sole Trader?
Sole Traders operate in a wide range of professions - from electrician and carpenters, to graphic designers and drivers. As long as you’re the only member of staff, you’re good to go!
Pros and Cons
For most entrepreneurs and freelancers, Sole Trader status is ideal when you’re just starting out. Many people choose to stick with this system even once their business has taken off. After all, one of the drawing powers of self-employment is autonomy and independence.
Sole Trader status will afford you the following benefits:
● Full control over your business
● Profit ownership
● Reduced legal admin
● Straightforward bookkeeping
Of course, like viewers of every single Spider-Man remake are continually reminded: “With great power comes great responsibility”. Many of the blessings listed above can turn into curses pretty quickly, depending on the circumstances. Some of the negatives associated with Sole Trader status include:
● Full control over your business (it’s lonely at the top)
● Debt ownership
● Reduced loan/finance eligibility
● Less free time (that legal admin and bookkeeping isn’t going to do itself)
● Less manpower (meaning growth might take longer).
Sole Traders can also use cash basis accounting and access the Simplified Expenses scheme.
2. Limited Company
Even if you’re a one-man show, you can still set up a Limited Company - though this is usually an option for businesses with multiple owners (directors). Directors are responsible for any legal and financial decisions the company makes. It can also have shareholders - people who invest in the business without being involved in the decision-making process.
One of the benefits of this status is that limited companies are separate legal entities. All assets and liabilities belong to the company. A director or shareholder cannot simply withdraw whatever money they want. Instead, this should be paid as a salary or dividends from the company’s available profits. (Not sure what to pay yourself? Check out our blog on this topic).
Who can set up a Limited Company?
As long as you’re not a disqualified director or an undischarged bankrupt, you can set one up. Although you’ll need to list a minimum of one director and one shareholder, these positions can be held by the same individual.
Pros and Cons:
Here’s an overview of some benefits of setting up a limited company:
● Limited liability (your personal finances are separate and safeguarded from any losses)
● Tax efficiency (better rates and more flexible options)
● Professional status (more appeal for customers and potential investors)
It’s important to note that, although the company is a separate legal entity, shareholders will bear some responsibility for any unrecovered debt. The good news is that shareholders only need to contribute according to the nominal value of their shares (which could be as little as £1).
The fact that your personal finances and assets won’t be touched (even if the company goes bankrupt) is one of the biggest advantages of limited company status.
If you decide to set up as a limited company, you’ll be both a director and shareholder. While these are pretty empowering titles, they also come with a lot more work.
Limited company status comes with its own set of complications, including:
● Higher set-up costs
● Company House incorporation
● Higher-maintenance admin and accounting
The paperwork load definitely increases with Limited companies. You’ll be responsible for filing company annual Confirmation Statements, Company Tax Returns, VAT (if applicable), paying taxes owed, as well as other important accounts with statutory boards such as Companies House and HMRC.
Which is best for my business?
If you’re a one-man show and your business is still in its infant stages, Sole trader status is probably your best bet. However, once you get things up and running, you’ll definitely want to upgrade to limited company status - even if you’re still going it alone.
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