When you make the decision to start your own company, you have to decide what its structure will be, with the main types being partnership, limited company and sole trader.
The choice you make will influence your responsibilities, including taxes payable, personal liability if the company makes a loss, how profit from the business will be paid to you, and the amount of paperwork to be completed. However, it is always possible to change the business structure at a later date.
Becoming a sole trader
Setting up a business as a sole trader is relatively simple, as you just inform HMRC. You will be registered with the Self Assessment system and given a Unique Taxpayer Reference number. Although you are called a sole trader, you don’t have to work completely by yourself, as you can employ people to work for you.
As a sole trader, you calculate your gross profits and deduct the allowable expenses. This leaves the net profit, which you can take for yourself. However, you will also be personally liable for any losses.
Responsibilities as a sole trader
You have to complete a self-assessment tax return every year with details of income and expenditure. You will be charged income tax on any profits you make and pay tariffs at the appropriate rate. National insurance will also be payable on profits. If your turnover exceeds the threshold for VAT, you will have to register for this as well.
A limited company
A limited company is a separate entity that is responsible for its income and any losses it makes. This means that your personal assets aren’t at risk, as you have limited liability. However, any profit made by the company is liable to corporation tax. When this has been paid, the net profit can be shared among those who own shares in the business. Directors have responsibility for running the firm and are often shareholders, but this isn’t always the case. There are more legal responsibilities when you run a limited company, although there are lots of benefits.
Responsibilities as a limited company
Statutory accounts have to be prepared each year, along with completing and submitting an annual return, which is sent to Companies House. You also have to submit a tax return to HMRC. As a director of a limited company, you will have to complete a tax return, as well as pay duties and national insurance on any salary you take from the company. If the turnover reaches the VAT threshold of £82,000, you will have to register.