Setting up your business

You may have heard both the terms ‘Sole Trader’ and ‘Limited Company’ mentioned in relation to setting up a business.  If you are not familiar with the process of setting up a business or are unsure of the pros and cons of each, and what your best option would be then we have summarised for you below. 

What is the difference between a sole trader and a limited Company?

How to set up as a sole trader

If you are a sole trader, then you (as the self-employed business owner) and the business you run are treated as one legal entity, which means that you are responsible (and liable) for both personal and business debts. Your personal assets such as house, car etc. would be used against any debt incurred by the business.

The paperwork as a sole trader is more straightforward, whilst you must keep detailed accounting records for your business, as a Sole Trader you have very few formal obligations to adhere to. 

Setting up is straightforward, just be mindful to keep clear records of your income and outgoings, as these figures will be required when filing your self-assessment.

To set up as a sole trader, you need to tell HMRC that you pay tax through Self Assessment. You’ll need to file a tax return every year.  When filing your self-assessment you are able to have more than one business as a sole trader.

Always check the UK Government website for what you need to do https://www.gov.uk/register-for-self-assessment/self-employed

Setting up as a sole trader

If you choose to set up a limited company for your business, the business is seen as a separate and distinct legal entity, and therefore separated financially and legally from your own assets. 

In terms of paperwork, this is more complex than running your business as a Sole Trader as there are a few reporting and management responsibilities that you must adhere to, including strict record-keeping requirements such as: registering with Companies House and filing your accounts and an Annual Return for your business.

Setting up will require you to register your company with ‘Companies House’ (cost to register is £13 – £40). 

It is worth noting that running your business as Sole Trader will mean you have limited protection over your business’ name, whereas setting up as a Limited Company can work towards protecting your company name.  Once you have successfully registered your company with Companies House another company cannot register under the same name.  However, if you have a unique name that you would like to protect, it would be advisable to seek advice on obtaining a Trademark.