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What's the difference?
What form of business vehicle would suit you best? Much of the advice online is geared towards the tax efficiencies of the different forms of business entities. However, you need to look at your new business venture in the round, making sure that you select the right model to suit your own particular circumstances.
Below we'll explain what the typical business entities are and their pros and cons. We hope it'll help you make an informed choice of what is best for you. Our advice is, that having looked at and understood your options, that you seek the professional advice of an accountant before making your final decision.
The choices for new, small businesses are likely to be one of:
Trading under a business name as an individual.
Trading under a business name with others.
Trading under a business name with others but where partners have limited liabilities.
Trading as a separate, incorporated business.
The first thing to remember about running a business as a Sole trader is that you and your business are one and the same thing.
Many new businesses in specialist trades and services like plumbing, hairdressing, electricians etc often begin in a small way trading independently under their own name.
Making this choice means that you are personally responsible for your business. You can employ people, but your business is ultimately owned and run by you. Because you and your business are one and the same it also means that you are personally liable for any debts and losses that your business makes. On the other hand, it also means that you get to keep any after-tax profits!
If you opt to start your business as a Sole trader and find that you want to expand and bring in others to work with you as oppose to for you this is very difficult to do and you may, at that point want to look at the other options of forming a Partnership or incorporating your existing business into a Limited company.
A limited company is a separate legal entity that you can use to run your contracting, or any other kind of business – even if you’re a one-person business. You would become the director and probably sole or main shareholder in the company.
As a director of a limited company, you are responsible for any legal, financial and commercial decisions which the company takes. It’s important to remember that the company’s assets and liabilities are completely separate from your personal finances.
One of the advantages of running a business through a limited company is that, providing that you act lawfully and with due care, if the company has any debts which it cannot meet; it’s not your personal responsibility the meet them. Your exposure is ‘limited’ to the value of the money you have invested in it (often a £1 share).
With a limited company you can bring in new investors or individuals to help you run and grow the company and give them shares in return.
Many agencies and end clients in the contracting industry will only engage contractors who use a limited company as their trading vehicle so going limited may not be a choice you can avoid making.
Directors of small limited companies and personal service companies are often rewarded through a combination of an annual salary and dividends. With dividends having a lower tax threshold than salaried pay there are opportunities to legally minimise the tax and National Insurance contributions you pay as an individual.
A limited company has to file an annual statement and accounts with Companies House and certain information about ownership and how the business is doing is in the public domain.
There are both pros and cons to operating through your own sole business or working through a company. Making a choice to go down one route or the other does not need to be an irrevocable decision but we do suggest that if you are unsure you should consult an accountant to help guide you.
We'll break down the calculation based on your hourly or daily rate so you can see what your take home pay could be. You can even input any expenses you may have.How much could you be earning?