Sole Trader or Limited Company—this is one of the most significant decisions you'll face as a business owner. Each option has its own advantages and challenges. However, understanding how these choices impact your business can save you from costly mistakes.

The Sole Trader Advantage

A sole trader business is straightforward to set up. Because you and your business are legally the same entity, getting started is simple and affordable. Additionally, sole traders enjoy fewer reporting obligations and generally lower administrative costs. However, despite its simplicity, this structure comes with risks. For instance, your personal assets are at stake if financial or legal issues arise.

Moreover, sole traders may struggle to attract investors or plan for substantial growth. For example, Emma, a fictional bakery owner, chose to run her business as a sole trader. Nevertheless, when faced with financial difficulties, she found her personal finances exposed.

The Benefits of a Limited Company

Conversely, a limited company offers greater protection by separating your personal assets from your business. Consequently, your liability is limited to the company itself. For example, Ali, who launched a tech startup, opted for a limited company to protect his assets and prepare for future investment opportunities.

Although forming a company requires more administrative work and compliance costs, it provides better opportunities for tax planning. Additionally, companies enjoy more credibility, which can positively influence how customers and suppliers perceive your business.

Making the Right Choice

When deciding between a sole trader or limited company, you must consider your goals, risk tolerance, and growth plans. Additionally, tax planning and administrative responsibilities play a crucial role. While starting as a sole trader might suit some, transitioning to a limited company can make sense as your business grows.

Final Thoughts

Sole Trader or Limited Company? The choice depends on your unique needs and ambitions. Before you decide, consult a professional for tailored advice. For more insights and guidance, listen to the I Hate Numbers podcast today!

One of the biggest decisions you'll make as a business owner is the decision as to how to structure your business. Options typically are, should you operate as a sole trader? Should you set up as a limited company? Each choice presents its own challenges and has its own benefits. In this week's I Hate Numbers podcast, I'm going to break it down into simple terms to help you decide which is the best option for you.

Let's start by understanding why the decision is so important. Many people in my experience over the last 30 years worth of experience, have made the wrong decision and that's cost of not just financially but anxiety that it can produce as well. And I don't want that for you. Now whether you choose to be a sole trader or form a company, it affects many areas exclusively, but some of those typical areas are the records that you'll need to maintain, the type of accounts you'll need to submit to HMRC, and other regulators, the level and amount of tax that you'll pay, and when that tax is paid, the level of personal protection that you as an individual will have, and also the overall cost of running your business.

Your choice, by the way, could even influence how potential customers and suppliers view your business. A sole trader is exactly what it sounds like. It's you running your business. You and your business are, in legal terms, one of the same. Now the upside is that it means it's quick and easy to get going. You can register online, open up your business bank account, and away you go.

You can, by the way, hire staff, work with freelancers, and serve both big and small clients. In my own business, I Hate Numbers, I started my business life 30 years ago in my back bedroom as a sole trader. That was the right choice for me at that point. And then in the future, later on, I converted to a limited company.

Now, one of the downsides of a sole trader is that you are personally responsible for everything. And by responsibility, I'm talking in legal terms. So if your business gets into debt, faces any legal issues, whether it's something you've done, some work that's below standard, or even the threat of litigation, your personal assets, like your house, or your car, or other assets that you may have, could be at risk.

You could risk losing them. Let's take a fictional person. Let's call her Emma, for the sake of illustration. Emma runs a small bakery and as a sole trader, she tracks herself, she tracks her expenses and she completes and files her tax return, or certainly gets a friendly accountant, cough cough, to do that for her and she pays her taxes. That's quite straightforward.

Let's assume that Emma's bakery ran into financial problems. Somebody sues her over a cake that's below standard and they become ill. If the case did go to court and if Emma was found liable for that, Emma herself would be liable for any debts that would arise. Now let's contrast that with limited companies.

Now unlike a sole trader, a company, once it's formed, becomes a separate legal entity. Think of it like giving birth to a new person, albeit in form. Now this legal entity, this thing that you've given birth to via the completion of certain forms, can sign contracts, can take on debt, and even when you decide to step away to your Caribbean island, it will continue to exist unless you formally dissolve the company, so it has what's called a separate legal personality. Now creating a company these days is relatively simple and affordable.

The options are you can either DIY or you can approach a very friendly firm, cough, cough, to do that work for you. However, I digress. Now, once that company is formed, it operates under specific rules laid out by the Companies Act. If you want to be more specific, the Companies Act 2006 in the UK. This will mean more paperwork and stricter reporting requirements.

The Companies Act is an act that affects companies, irrespective whether they're publicly listed companies, or private companies. Now, let's go back to my company, the company I Hate Numbers Limited. Now, I Hate Numbers Limited will send invoices out to clients, manages its own accounts and will pay corporation tax on the profits it generates. Now, if I Hate Numbers for whatever reason and face financial difficulties, then my personal assets, like my home, like my car, will be protected.

Now, that protected, by the way, folks, will be negated if you give personal guarantees. But in general terms, it's the company, not me individually, that's responsible and liable for any of those financial debts that might be levied at me. Now, however, I must follow the rules about how the money flows in and out between me and the company.

I am an individual. I will be classified as a director employee and also a shareholder so the money that comes to me has to be accounted for in that fashion. And also there will be additional administrative responsibilities, such as for example, filing an annual statement, a confirmation statement is the old-fashioned term, submitting accounts and tax returns as well. Now why might you choose one over the other? Well, let's have a think. Well, a sole trader it's much easier to set up and manage.

You've got fewer reporting obligations. It's normally cheaper to run as well in terms of like accountant's fees and additional compliance costs. It also has tax advantages to it, more on that on another podcast. Now contrast that to a company, you do get that personal protection, and if you think that risk is real, then obviously the company veil, that company personality, that company vehicle is going to be quite important.

You do have better opportunities for tax planning and it's easier to sell that business at some point in the future. Let's throw in another example. Ali, for example, starts a tech business. He chooses a limited company because he wants to keep his personal assets separate from the company's risk. There is a possibility that he may, either him or one of his team do something wrong when they're installing some hardware,

so he wants to minimise the financial exposure, and also at some point in the future in his growth plans, he's envisioning in bringing in additional investors. That gives him that confidence to move forward with his company. Now here's some general things to think about when you make your choice: sole trader or limited company.

What are your business goals? Are you looking for a simple life? Do you plan to grow and attract investors? What's your risk appetite? What's your attitude to risk? Are you somebody who's a risk seeker? Are you somebody who's quite cautious in their risk outlook? Do you want personal protection from any debts that might arise?

Tax planning. Now companies do have more in the toolkit for tax planning opportunities, and it's certainly important that you structure your company correctly from the outset, and also that you make sure that you access good competent tax planning advice. Cough, cough. The cost of administration is a factor, sole traders Do have fewer costs in general in terms of running the business. Companies will require more paperwork and accounting, most things that are done in terms of like dividend withdrawals, changes in company constitution, competition will require director minutes, director meetings, etc. So therefore you have to bear in mind that the secretarial impact the company administration is heavier for a company than it will be for an equivalent sole trader. Now, you can mix and match these by the way, you can start your business life as a sole trader and form a company later, you can have many different businesses,

some can be run as sole traders, some can be run as companies. My normal default advice to somebody without seeing the numbers is: start off as a sole trader and then later on down the track you can convert. Now again, this is just very generic advice. I would never advise anyone to do something unless I've actually seen those numbers.

But if you want a rule of thumb, simplicity might be something, especially if you've got a side hustle and you've got a full-time job and that's the route you might want to take. Now to wrap up, there is no one-size-fits-all answer. The best structure of your business is driven by your goals and your risks and how you want to manage your affairs.

Structure follows objectives. I've seen too many people over the years who forming a company because they think that's the best thing, start running their business and they discover several months when it's potentially a little bit too late, that actually that was the wrong choice to make. So certainly seek advice before you dive in. Take time to understand your options and if you're unsure, speak to a professional who can guide you.

The words of Jean Nidetch is what I'd like to finish with. It's choice, not chance, that determines your destiny. Until next time folks, plan it, do it, profit. We hope you enjoyed this episode and appreciate you taking the time to listen to the show. We hope you got some value. If you did, then we'd love it if you shared the episode.

We look forward to you joining us next week, for another I Hate Numbers episode.