One of the first decisions you need to make when setting up your own business is whether you want to run it as a sole trader, in partnership with someone else, or as a limited company. Each option has advantages and disadvantages, so it’s worthwhile taking some time to understand how each might affect your business and the way you run it.
Choosing to become a Sole Trader will give you these advantages:
Easy to start – and finish. This is the simplest way to start in business. All you need to do is register as self-employed, register for VAT if necessary, and make sure you comply with any special regulations covering your chosen trade. Closing your business is equally straightforward.
Your own business. A sole trader is completely responsible for the whole business. You make all your own decisions without having to ask anyone else’s opinion or permission.
All of the profits. What your business makes belongs to you.
Privacy. A limited company has to publish its accounts, which anyone can inspect, but as a sole trader you only have to divulge your financial details to the relevant authorities.
Lower taxes. Some tax rules, such as those for capital gains and offsetting losses, are different for sole traders and limited companies, with sole traders often getting the better deals.
Less paperwork. Sole traders must keep accounts and business records, but running a limited company involves far more administration and record keeping.
Easy to change. If you later decide to run your business as a limited company the change will be less complicated than if you begin as a company and want to change to a sole trader.
But you also need to aware of the following disadvantages:
Personal liability. You are responsible for all debts incurred by the business so, if the business fails, your personal assets are at risk. You could even find yourself facing bankruptcy. You can also be personally sued for any damages your business causes (for example, if you fail to fulfil a contract).
Financial difficulties. In today’s economy, even large, well-established companies are finding it difficult to get business finance. Banks will be happy to take your money, but most are extremely wary of lending to a sole trader. You might also find that suppliers are unwilling to offer you the same credit terms and discounts they would offer to a limited company.
Public perception. Although a sole trader can offer a more personal service to customers, some clients prefer to deal with a larger company and appreciate the protection it brings.
Competition. If your main competitors are also sole traders you can compete with them on an equal footing, but it’s much harder to survive if a larger company sets up in opposition to you.
Each business is different, so take a good look at your own circumstances and business plan before deciding which will be the most suitable: becoming a sole trader, setting up a partnership or forming a limited company. Whatever you do, take professional advice to ensure you get your business off to the best possible start.