Over the years, my husband has worked as a sole-trader (with or without a trading name). He has also formed limited companies. In each case there were reasons for choosing the route he did. Today he is sharing those reasons in this blog post. If you want to know more about setting up a limited company, read on!
Over to you Hubby dear…
Many people start a business as a sole trader – often if they are ‘testing a market’ or unsure whether it will ever become their sole income source. A good example of this is eBay traders or general maintenance contractors (gardeners, painters and decorators etc). A sole trader can use a ‘Trading As’ name, for example ‘John Smith trading as ‘Smith Decorators’. Essentially, the business is just John Smith’s – and any liabilities are John Smith’s.
The increasingly popular ‘gig economy’ – Uber Drivers, ‘hobby designers’ etc, usually rely on sole traders rather than limited companies. There’s generally little advantage for those people to go down the limited company route.
The pros of setting up a limited company
Forming a limited company however does have a number of significant advantages. The company – even if you’re the only shareholder, is a separate legal entity in its’ own right. The owner’s liability is limited to the amount paid for their shares (or unpaid value of their shares).
As there is no set value to shares or the number of shares when a company is formed, this can be as little as you like. Most companies are formed with 100 shares valued at £1 each, so as a sole director and shareholder, your liability is limited to just £100.
However, directors do have important responsibilities – and if creditors lose money as a result of director fraud, the personal liability of that director becomes unlimited.
A limited company can bring tax benefits too – sole traders pay income tax, while companies pay corporation tax. As a sole trader, any profit you make is liable to income tax. Whereas as a shareholder director you can choose to take a more tax efficient combination of salary and dividends. You really need the advice of an accountant, regardless of the route you go down. A good accountant will save you more than they cost you!
Setting up a limited company is much easier these days than it used to be, and cheaper too – companies such as One Click Group will handle the incorporation, deal with HMRC, set up payroll and more for less than £100! If you’re starting a new business, or considering turning a hobby into something more serious – it’s worth considering all options.
Finally, for those that do form limited companies, one of the main reasons for doing so is the prestige it brings. Many larger companies simply won’t work with a company that isn’t a limited company. That’s especially true if you hope to gain government or council contracts, regardless of the contract size. Being a limited company gives the impression your business will be a long term thing. It shows commitment and gives the impression of permanence to potential clients. There are definitely plenty of treasons to consider setting up a limited company.
Additionally, a sole traders ‘trading as’ name is unprotected. This means there can be any number of ‘Smith Decorators’ at any one time. Only one limited company can exist with your business name. Once you’ve registered ‘Smith Decorators, Limited’ – nobody else can register that name, or even one too similar.
Are you considering setting up a limited company? I’d love to hear your thoughts and opinions if you are.
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