Every couple of weeks in my Facebook groups the question pops up – what type of business ownership should I go for? I am always cautious of giving any advice as I am not an accountant or FSA regulated.
Instead I am writing this blog to give you an idea about the two main types of business ownership in the UK.
The three main types for start up businesses are: sole trader and private limited company.
Sole Trader:
This is the simplest and most popular form of business ownership. You run your business on your own and you keep all of your business profits (after tax).
You have unlimited liability which means you are personally liable for all of your business debts, if you do get into financial problems the people you owe money to can take your personal assets (car, house etc) to pay your debts (this the same as partnerships unless you are a limited liability partnership)
You need to keep records of all of your revenue (sales) and costs (expenses) this includes receipts, complete a self assessment tax form every year, pay income tax and national insurance.
When you name your business it can be your own name or another name and it doesn't need to be registered, there are a list of words that you are unable to use on the gov.uk website.
Advantages:
– Control – you are 100% in charge of your business so you can run it exactly how you please (whereas with a partnership you would have shared control and decision making)
– Profit – you get to keep 100% of the profits (these would be shared in a partnership)
– Privacy – you can keep all of your information including financial information to yourself
Disadvantages:
– Unlimited liability
– Finance – it can be harder to raise finance as a sole trader
Private limited company
A private limited company or LTD is the other option if you are starting a business on your own.
When you set up a private limited company it is legally separate from you with separate finances.
There is more paperwork involved than a sole trader as you have to register at companies house (this is relatively straightforward and can be completed on the gov.uk website).
You will need to register the name and it has to be unique, if you are like me and have an unusual name and a lack of creativity when it comes to finding a new name then this works out well, for others it can be a slightly painful process!
You share with companies house your company address (which can be a home address, your accountants address, a PO box, a co-working space you are registered at etc), and information about the directors and company secretary and your shareholders. There is a bit of paperwork involved!
When you run a LTD you need to keep to the rules as set out in your articles of association, update records annually and report changes, file annual accounts and pay corporation tax.
It is strongly advised that you have your accounts professionally audited by an accountant before you submit them.
Company directors often choose to be paid a salary and dividends from shares and there are a number of tax implications for these (speak to someone who is a specialist in this!)
Advantages:
Limited liability – you are only liable for the amount of money that you have invested in the business
It can be easier to raise finance
It is viewed by many as more professional
Disadvantages
Paperwork
Public disclosure of company accounts
Legal restrictions
Many people start off as a sole trader and become a limited company further down the line, the key thing to think about here is to check that your company name isn't the same as an existing company.
Your choice of ownership is dependent on your individual circumstances.
The government website www.gov.uk provides more comprehensive information.
