Deciding upon the legal statute of your company is something that might require specialist advice and guidance from people such as accountants and tax advisers.
Without knowing the specifics of your individual situation, all that can be done is to highlight some of the principal issues and to allow you to see whether or not they apply to you.
Sole trader
In the UK, as opposed to many other countries, it is perfectly possible to commence business virtually overnight. Few if any regulations exist relating to mandatory pre-registration and all that may be required is the need to ensure that you eventually conform to reporting requirements relating to income and the associated tax declarations.
Businesses started on this basis are often described as having sole trader status. That usually means that it is a single individual operating professionally but not as a separately constituted a legal entity. A partnership is a different legal status again.
The advantages of operating as a sole trader include:
- virtually zero set up cost;
- few formalities;
- no need for accountants and the submission of audited annual accounts.
There are though a number of issues to be considered:
- if your business operations incur debts, your creditors may be able to recover those through the seizure of your personal assets and possessions. Effectively, you have unlimited personal liability for your business debts;
- certain forms of capital allowances might only be available in situations where your company is registered as a separate legal entity. A qualified accountant can advise you further on this;
- although today, in reality, the quality connotations of being a formally constituted company are less than they once were, nevertheless some customers may prefer what they perceive to be the reassurance of dealing with a company rather than an individual;
- some providers of business funding like Everline, may require that you are a limited company before they will be able to consider dealing with you although that might not always be the case.
Limited company
Operating as a limited company normally means a relatively modest amount of pre-registration at the time you commence business operations. In fact, these formalities are now largely completed online and they do not constitute a particularly great expense or administrative overhead. For example, you will need to confirm shareholder status etc.
Institutions such as Companies House and HMRC may have specific sets of requirements for company reporting (including accounts) once the business is a legal entity as opposed to a private individual. As such, your annual operating overheads may be a little higher.
However, the advantages of operating as a limited company are largely the reversal of some of the negatives outlined above for the sole trader. Perhaps the most significant of these overall is the fact that it is your company that incurs debts and not necessarily you as a director of it. That may help to protect some or all of your assets if your business fails.
In summary, the differences between sole trader and limited company status have probably eroded over the years. Even so, there may be situations where one is more suitable for you than another.
If you are in any doubt – take advice!