Business and Other Services

What is a sole trader?

A sole trader is essentially a self-employed person who is the sole owner of their business. It’s the simplest business structure out there - which is probably why it’s the most popular – and you can set up as one via the GOV.UK website (you’ll need to do this for tax purposes).

What is a limited company?

A limited company is a type of business structure that has its own legal identity, separate from its owners (shareholders) and its managers (directors). This remains the case even if it’s run by just one person, acting as shareholder and director.

Sole trader vs limited company

Now, setting up as either structure will bring its own benefits and drawbacks, so starting with the sole trader option let’s take a closer look…

Sole trader advantages

• Easy to set up and relatively little paperwork, other than an annual self-assessment tax return.

• Greater privacy than incorporated businesses, whose details can be found via Companies House.

Sole trader disadvantages

• Sole traders have unlimited liability, as they’re not viewed as a separate entity by UK law. This means that if the business gets into debt, the business owner is personally liable. As such, sole traders could lose personal assets if things go wrong.

• Raising finance can be tricky, as banks and other investors tend to prefer limited companies. This limits the expansion opportunities of sole traders.

• Tax rates on sole traders aren’t always as kind as they are on limited companies. When you reach a certain level of earnings, it might not be quite as lucrative to stay a sole trader.

So, what benefits and drawbacks does setting up a limited company bring?

Limited company advantages

• Unlike a sole trader a limited company has the benefit of limited liability, as incorporation forms a legal distinction between the business owner and their business. This means that personal assets aren’t exposed – you only stand to lose what you put into the company.

• Broadly speaking, limited companies stand to be more tax efficient than sole traders, as rather than paying Income Tax they pay Corporation Tax on their profits. As things stand this offers a kinder tax rate, meaning forming a limited company can be more profitable. In addition to this, there’s a wider range of allowances and tax-deductible costs that a limited company can claim against its profits.

• Once you’ve registered a company name nobody else can use it, in contrast to sole traders who aren’t offered the same protection.

Limited company disadvantages

• Life as a limited company brings added responsibilities. These come in the form of what’s called the Director’s Fiduciary Responsibilities, which basically outline what a limited company director must do legally. You’ll need file a yearly annual return for one, as well annual accounts.

• Thanks to these added responsibilities going limited can be costly and time-consuming, as you’ll need to either deal with this extra paperwork yourself or hire an accountant to handle it. You’ll need to pay a fee to incorporate too check out our guide to setting up a limited company to learn more)

• In contrast to sole traders information on your business can be found via Companies House, details on directors and your company’s earnings required to be shown publicly. This sort of transparency may not appeal to all.

Ultimately then, it’s vital to weigh up the difference between sole trader and limited company, as which structure you choose could impact on everything from profits to paperwork. Don’t rush into any decision and speak to an accountant if you’re unsure, as their expertise can be invaluable when it comes to the tax facts.

Elsewhere, investigate insurance - regardless of which structure you choose - as running either type of business will bring its own unique risks. You can discover more on our dedicated sole trader insurance and limited company insurance pages, built to give you a basic overview of what you’ll need.

 

 

Limited Company Formation...

Here we’ve listed the information and documents you’ll need to complete the process, and some things to bear in mind before you go ahead.

1. Company Name

This must be unique, and not contain any ‘sensitive’ words or phrases – i.e. you can’t use a trademark in your name or pass yourself off as something you’re not. It is worth spending some time choosing the right name for your company. Find out more here.

2. Company Registered Address

You must have an address where official mail can be sent. Many contractors simply use their own residential addresses, or you may decide to use a third-party service, or even your accountant’s company address for this purpose.

If you’re setting up a company in England or Wales, then the registered address must be within one of these countries. The same applies for Welsh, Scottish or Northern Ireland-based companies – the registered office address must be in the corresponding territory.

3. Company Officials

To form a company, you must have at least one director. You may decide to appoint a company secretary, although this is no longer mandatory. You will need to have all your officials’ names, addresses, nationalities and dates of birth to hand when you apply. If you’re concerned about privacy, directors may elect to use a ‘service address’, so that their residential address doesn’t appear on the public record.

4. Share Structure

You need to decide how the shareholdings in your new company are apportioned. Will you own all of the shares yourself, split them with a spouse, or with other people? Do you require different classes of shares? When you declare dividends, they must be distributed exactly in the same proportion as the shareholdings themselves. You may be wise to discuss the best way to set up your company’s share capital with an accountant.

5. Shareholders

For each shareholder, you will need their name, full address details, class of share, and the number of shares they will own. In addition, you will need to provide three pieces of personal information (in lieu of a signature). These include birth town, last 3 digits of telephone number, National Insurance Number or Passport number, mother’s maiden name, eye colour, or father’s first name.

6. PSC Register

All companies must now keep a record of all ‘People of Significant Control’ – this includes people who own 25% or more of the shares in a limited company, or have 25% or more of the voting rights. Following the initial formation, this information is updated via the Confirmation Statement which all companies are required to submit to Companies House each year, to keep the registrar up-to-date.

7. Articles of Association

All companies must have a set of Articles, which act as a ‘rule book’, and govern all aspects of running a company – including directors’ powers, decision making by shareholders, voting rights, and how dividends are distributed. You can elect to use ‘model articles’ (a generic document), which should be sufficient in the majority of cases.

You can download example model articles here.

Importantly, if for whatever reason you decide to use your own amended articles, you cannot incorporate your company online. You’ll have to use the postal method (Form IN01).

8. Memorandum of Association

This is an agreement which confirms the intention of initial subscribers to form a limited company in the first place, with the following wording:

Each subscriber to this memorandum of association wishes to form a company under the Companies Act 2006 and agrees to become a member of the company and to take at least one share.

This is followed by a list of all subscribers. You can download a Memorandum template here.

When you enter the details of each shareholder during the online formation process, just ticking a checkbox confirms that the shareholder has authenticated the prescribed form memorandum of association. There is no physical document to submit.

9. Standard Industry Classification (SIC) Code

Each trade/industry has a unique SIC code to identify what a business does. You can browse the full list here. Section J is likely to be of most interest to contractors, for example:

SIC Code	Description
62012	Business and domestic software development
62020	Information technology consultancy activities
62030	Computer facilities management activities
62090	Other information technology service activities
63110	Data processing, hosting and related activities

You can add up to 4 SIC codes to describe your business, although a single code will often suffice for most contractor companies. Read our dedicated guide to SIC codes here.

10. Further Considerations

If you’re setting up a company directly, you can do so via this Companies House page.

Here are some additional things to consider when setting up a limited company for the first time:

• We recommend you sign up to receive email updates on future limited company tax and legal changes, via our in-house newsletter.
• You should find out what legal and financial obligations company directors have.
• Find out what statutory records are, and how to maintain them. Read this article for more information.
• You need to register for Corporation Tax within 3 months of carrying out business via your company. You may also need to register for VAT. If you’re paying anyone a salary via your company, you will also need to register with HMRC as an Employer. You’ll be pleased to hear that these are all tasks an accountant can do on your behalf – and most specialist accountants will register your company for all relevant taxes as part of the initial company formation process.
• Find out why choosing the right accountant is so important.