If you’re starting a business that’s only ever going to have one employee, you’ve got many big choices to make. One of the most important is this –
“what legal structure am I going to use to run my business?”
There are two main answers to this question; either through a limited company, or as a sole trader. Whilst other legal structures do exist (e.g. LLPs, which you’ll often see used by law firms), but if you’re working on your own, limited companies or sole traders are what you’ll be considering. So, what’s the difference?
If you operate as a sole trader, you are effectively trading as you, the individual. Setting up as a sole trader is easy to do, and effectively means that you are directly interacting legally with your customers. Being a sole trader makes for a simpler tax situation, but it has one big downside – liability. If something goes wrong as a sole trader, then you personally can end up on the hook for anything that you owe. This means that your personal assets could be taken to repay the debt.
With a limited company, that liability issue is removed. Limited companies are separate legal entities from the people behind them. If the limited company goes bust, you cannot be held liable for its debts. Hopefully, you’d never need to use that protection, but it’s nice to have. Limited companies also have a different tax situation from sole traders. As a sole trader, any money you make is charged as if it were your own personal income, with the associated rates. Limited companies have different tax brackets and rates, which may be more beneficial to your finances. The other side of this, however, is that a limited company has to file a set of accounts with HMRC each year to prove its financial status and calculate the tax bill, which does add to the admin.
What is Right?
All in all, there’s no “best” choice for your legal status. It’s down to what you prefer (or you can discuss with your local accountant) But you should always keep these notes in mind when looking at your company’s structure – after all, it’s possible to change if you want to!