Limited Company or Sole Trader? Which is best?Small Business Advice 27 February 2012
It may not seem a critical choice to make in the beginning of your business life, but this is actually one of the most important decisions you will ever make when it comes to your business. It is a decision that should usually be made based on an informed choice and with the help and advice of your accountant. This article is designed to give you a better idea about both and perhaps raise a few questions you may not have considered.
With ownership comes responsibility
When it comes to ownership of the business, if you’re a sole trader you have ultimate control over everything that happens. However, when you have this control over the business and are able to steer the business decisions to suit your own personal requirements, you must also realise that you are 100% responsible for anything that goes wrong and fully liable for any costs incurred.
A Limited Company, on the other hand, won’t let you make all the decision based upon what you want, because all decisions must be made by the directors of the company and be in the interests of the company. This is often a spanner in the works when it comes to wanting to steer the company in a particular direction. Limited companies often have shareholders that have invested in the company in order to see some return on their money, so you have to be very careful to ensure that your business grows and gives them this return; it can be quite a pressure.
With a limited company, the finances of the company exist completely separate from the owners. All funding for the business comes from profits, loans and investors. Effectively, no-one owns the company, they just run it; the company exists on its own. Any money you take from your company must exist as a salary. This is a distinct advantage, if the company runs into financial difficulty, since it is the company that is responsible and not the individual directors.
When you run a sole trader business, you are directly responsible for all the finances and liable for any debts that your business runs up. This could involve you losing everything if things get very bad and you are forced to sell the business and any assets. However, when you operate as a sole trader business, you are much freer to take money, as and when you like, from your business, as long as the business has enough money to operate efficiently.
These are only a couple of factors to consider when it comes to choosing what kind of business to start up. It’s really best if you consult a professional, such as an accountant, as they may be able to tell you something you haven’t previously considered.