When you decide to start a business, one of the first choices you need to make is whether to create a Company or operate as a Sole-Trader. Often people are pushed towards the company option, but should this really be the default option?
For me it's a fundamental decision and many things should be considered.
What is a Company?
A Company a legal entity (separate to the owners) created for the purposes of carrying out your business. Whereas being a Sole-Trader means you are running a business directly as yourself.
Clearly, creating a new legal entity means more work and most likely more professional fees.
At this point I should declare a "conflict of interest": While I am trying to present an unbiased round up of things to consider, I am an accountant. This means I'm perfectly placed to help you with the additional burdens of running a limited company....
Tax Advantages
This is the usual reason given for creating a company. The advantages in this regard are diminishing with various changes to the tax system. However, the use of dividends and being able to keep your income within certain thresholds can help manage your tax burden.
My personal views are more along the lines that "the Tax Tail should not wag the Business Dog"
It's also important to mention that a sole-trader can carry any losses back against their income in prior years. Worth considering for a fledgling business struggling through the initial years. You can always turn your sole-trader business into a company at a later date.
Limited Liability
A Company is a separate legal entity. So, any liability is limited to that company. There are exceptions to this, such as if there is evidence of deliberate wrong doing. As the liability is limited, it's not uncommon for business owners to be asked to personally guarantee any bank loans.
Other Considerations
Here are some other things to think about regarding going down the company route:
Status - being a Company can give a more professional appearance. Some businesses have a policy of only dealing with Companies.
Reset the clock - creating a new entity means that there is no track history. This can affect things such as insurance and regulation.
Accounts are public - your annual accounts need to be filed with Companies House and are available for the public.
The Key Question
For me it all boils down to one question:
"Are you running a business trading your own work or looking to create an organisation bigger than yourself?"
If you are looking to create something bigger, with succession planning and staff, perhaps the Company route is the way to go.
If your business consists of only you doing your own thing, then it might make sense to keep things simpler as a sole-trader.
