Operating as a limited company is the one of the most popular business for all sizes and types of businesses. In order to register a company in UK, The business must be incorporated legally with the Companies House. Companies House is a government agency which is sponsored by Department of Business, Innovation and Skills. It operates as official registrar of the companies in Wales, England, Northern Ireland and Scotland.
When a limited company is incorporated, it is considered a separate individual by the law. A limited company is responsible for its own liabilities and debts. The company has to disclose some corporate information on the public records. Companies must also adhere to different reporting and filing requirement according to the Companies Act of 2006. They also have to pay 20% Corporation tax on their taxable income.
Both a for profit company which is limited by shares and a non-profit company which is limited by guarantee, enjoy many benefits which are not available to the sole traders. Operating as a sole trader is also a very popular structure for businesses of small and medium size. In fact it is the 2nd most popular type of business structure in the UK.
In a sole trader structure of business, the business is owned and operated by the same individual and he is himself liable for all the claims and debts. The person is also responsible for paying National Insurance Contributions and Income tax return on all the taxable income. The person has to file Self-Assessment tax return each year. There is no legal distinction between a person operating as a sole trader and his business.
The major differences between the two types of structures are tax efficiency, professional status, required administrative and filing responsibilities and financial liability. One should consider these factors carefully in order to determine which legal structure will give the most benefits to the business and the owner.
One or more people, called members are the owners of the private limited companies. The members of those companies which are limited by shares are referred to as ‘shareholders’. On the other hand members of those companies which are limited by guarantee are referred to as ‘guarantors’. The directors are responsible for managing the both types of companies.
However, large number of small companies are managed and owned by only one person who takes care of the roles of guarantor/shareholder as well as director. A limited company has a flexible nature, giving and opportunity to set up companies with multiple directors and members and an opportunity to appoint new people after formation.
Advantages of operating as a limited company:
The three main reasons of trading as a limited company are status, tax efficiency and limited liability.
If you want to provide high value services or supply which can lead to liability claims and/or operate in public domain then limited liability is important. In such situations, your personal finances and assets are protected. Operating as a sole trader does not have this benefit.
The directors can keep their income level below the higher bands through taking remuneration in combination of dividends and salary. This results in more money being available for reinvestment or distribution among the shareholders and directors. Sole traders don’t have any such strategy to save tax.
Although operating as a limited company has greater administration costs and accounting requirements, requiring more attention and time, the professional and financial gains cover these drawbacks.
Disadvantages of operating as a limited company:
Starting a sole trader business is quite easy. The administration and registration requirements are very simple and one can begin trading any time he likes. Operating as a sole trader does not require working alone and one can employ people to work for them. Ultimately the owner is personally and wholly liable for the business and the debts.
On the other hand as there is no legal distinction between the personal finance and the business finance of a sole trader, one does not have to go through a complex procedure in order to take money for personal use.
Responsibilities and Rights of sole traders:
Advantages of operating as a sole trader:
Disadvantages of operating as a sole trader:
John Carter is a leading expert in the company formations industry. He has assisted countless business owners incorporate companies and is a font of knowledge when it comes to starting a company!