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Limited company or sole trader: which is best?

If you are starting a business in the UK, you can choose what type of commercial entity you want to trade under.

Many will decide to create either a limited company or become a sole trader. However, which one might be best suited for your needs? The following should help:

Sole trader

Becoming a sole trader is definitely the easier of the two options, and you will have this choice if you are the only owner of the company.

You will have complete control over your business. However, you are also liable for all losses. Meanwhile, your personal assets can be used to pay off any debts.

A sole trader is legally responsible for anything that goes wrong. On the plus side, after you have paid all taxes owed, you get to keep 100% of the profits.

Setting yourself up as a sole trader is as simple as registering with HMRC. However, before doing so, you will need to choose a name. While there are a few caveats to your choice, once you have done so, you will be able to fill out the form to register as a sole trader with the HMRC.

Limited company

Forming a limited company is a little more complicated, as you need to register with Companies House as well as HMRC.

Limited companies have to have at least one director, as well as a shareholder who acts as a guarantor. However, one person can legally fill both positions.

You will have to be at least 16 and not be a disqualified director or undischarged bankrupt. To form a limited company, you also need to provide a British address. However, non-UK residents can still form such an enterprise if they have a physical address to receive official letters from HMRC and Companies House.

Business records will also need to be stored at this address, so some people use their accountant or solicitor for this purpose.

Employees are paid salaries within a limited company. However, if you are the only worker then just one wage will be paid. Dividends are paid to shareholders.

Get expert advice

Regardless of what you decide, it makes sense to receive help from an accountant to get things going. Doing this gives you a chance to double check your logic and ensure that no mistakes are made when registering the business. Any errors made during the formation process can end up costing you dearly later on, so it is better to get professional assistance to make sure that the setup is done properly.

Posted by Peter
March 6, 2015
Features

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