Setting up a business

setting up a business

Thinking about starting your own company? Whether you’re simply trying to generate some extra income on the side, or you have big plans to be your own boss, you will need to register your business.

There are different ways to do this, and the method you choose depends on the the type of business you want to run, your personal circumstances and your business goals.

There are 3 main ways to register your business. They are:

  • As a Sole Trader
  • As a Limited Company
  • As part of an Umbrella Company

In this article we’ll discuss the pros and cons of each.

Sole Trader

Commonly know as being ‘self employed’. As a sole trader, you work as an individual and you are personally responsible for the business. You get to keep all the money you make after tax & deductions, but the business’ debts are also your debts.

Advantages of being a sole trader

Less admin & simpler paperwork – As a sole trader you have to complete & submit a tax return every year. You can do this yourself or get an accountant to help you. There is less paperwork to do compared to a limited company, so if you are using an accountant their fees will likely be lower.

More privacy – Limited companies are required to make certain information available to the public – such as accounts and the names of directors and shareholders. This is not the case with sole traders.

Quick access to your money – Limited companies have stricter rules about withdrawing money from the business. As a sole trader, the business’ money is your money and you can access it right away.

Disadvantages of being a sole trader

Personal liability – There’s little distinction between you and your company, which means you are personally responsible for your business debts.

Less tax-efficient – Running a limited company gives you more options when it comes to when & how you pay yourself, which can help minimise tax. Sole traders don’t have this level of flexibility.

Limited Company

A limited company is a distinct legal entity – so your company’s finances, assets & liabilities are kept completely separate from your personal finances. Even if you’re a one-person business, you can set up a limited company and become the director.

Advantages of running a limited company

Limited liability – If your company gets into financial difficulty, debt collectors cannot reposes your home or personal possessions.

More tax efficient – As a sole trader, all of your profits will go into your personal bank account and you will pay tax & Nation Insurance (similar to being paid by an employer). Things work a little differently as a limited company – you pay corporation tax on your business profits, then you can pay yourself through a combination of salary and dividends. This can minimise the amount of PAYE tax you have to pay. You can usually claim more business expenses as a limited company compared to a sole trader (although we strongly recommend you get advice from an accountant).

Trust and prestige – Having ‘limited’ in your company name can inspire trust in potential customers & clients, as it creates the impression of an established, professional business.

Disadvantages of running a limited company

Cost of setting up – There are some fees and costs associated with setting up a limited company, which could be off-putting for casual freelancers or those with little budget.

More complex accounting – Limited companies have to make various annual returns and file annual accounts with statutory bodies such as Companies House and HMRC. They also have stricter record-keeping requirements. As such, you will need to hire an accountant.

Less privacy – Limited companies are required to disclose certain personal and corporate information on public record – including the names & details of directors.

Umbrella Company

Think of this as a halfway-house between being employed and being self employed. You find clients, provide services and manage your time just like you would if you were a sole trader – but the umbrella company takes care of things like payments, accounting, tax and payroll. They will take a fee for their services and give the rest of the money to you.

Umbrella companies are popular with contractors and agency workers.

Advantages of working for an umbrella company

No admin or paperwork – If managing invoices and filling in tax returns just isn’t your thing, an umbrella company takes care of this for you. You simply receive your ‘wages’ just like you would if you worked for an employer.

Disadvantages of working for an umbrella company

They charge a fee – Umbrella companies usually charge a flat fee per week or month, but sometimes will take a percentage of your earnings.

How to register a new business

You can find more information about setting up as a sole trader or a limited company on the government website.

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