Do you want to start your own business? Don’t know How to decide which type of company is right for you?

There are two types of companies that you can choose from when starting a business. Sole traders and limited companies. Both have their pros and cons. Understand your needs before making any decisions about which type of company is right for you.

This week’s weekly I Hate Numbers podcast makes the decision process easier. I outline the differences between sole traders and limited companies in an easy-to-understand way. I also includes some helpful tips on how to decide if one or both types of businesses would be best for your situation.

Listen to find out more!

Sole trader versus limited company

Sole traders are just that - they trade on their own. They have no legal protection for themselves or their assets in case of bankruptcy. Limited companies offer this protection by giving owners limited liability, but it also comes with more admin and duties for directors.

It's important to understand what your needs are before making any decisions about which type of company is right for you.

This week’s podcast of I Hate Numbers will help make things clearer. Moreover you can find out if sole trading or becoming a limited company is best for your business. You will be able to see the pros and cons of each option, as well as seeing what’s what needs to be done when setting up either one.

Listen to find out more!

What about your business risk and responsibilities?

For many smaller businesses being a sole trader offers a few financial advantages, but it also brings an increased level of risk.

Becoming a limited company can protect owners from these risks by giving them limited liability, but more admin and duties for the directors.

The difference between these two structures has to do with how they see you as an individual and your business. With a limited company, you don’t have liability for any debts or losses but if you are a sole trader then the law sees you and your business as the same so in this case, if there's any debt or loss then it will be seen as your personal responsibility.

If this sounds like something that you are looking at then I highly recommend you subscribe to find out more. I also have some great resources on our site to help make sure everything goes smoothly when setting up either of these options. So, take some time today to explore all the information I've put together just for you!

Listen to find out more!

What next

You do not have to worry about making this decision alone! Contact us to see how we can help How to decide which type of company is right for you? Our news section, FREE online calculators is there for you. Just click here now to get started!

Listen now and Subscribe to I Hate Numbers, so I can send it straight to your inbox every week with all the latest updates from I Hate Numbers podcast!

Click here for more business and finance, news, advice and tips

Links

https://podcasts.apple.com/podcast/proactiveresolutionss-podcast/id1500471288

https://play.google.com/music/m/I3pvpztpjvjw6yrw2kctmtyckam?t=I_Hate_Numbers

https://open.spotify.com/show/5lKjqgbYaxnIAoTeK0zins

https://www.stitcher.com/podcast/proactiveresolutionss-podcast

https://tunein.com/podcasts/Business–Economics-Podcasts/I-Hate-Numbers-p1298505/

You are listening to the I Hate Numbers Podcast with Mahmood Reza. The I Hate Numbers podcast mission is to help your business survive and thrive by you better understanding and connecting with your numbers. Number love and care is what it's about. Tune in every week. Now, here's your host, Mahmood Reza.

One of the more important business decisions that you'll make in your business life is what you should be i.e should you run your business as a sole trader, or should you run your business through a company? Hi folks. My name is Mahmood, owner and proprietor of an accounting firm, training company, mentor, and educator for over 26 plus years,

and I'm here to improve your money mindset, make you more money, save you time, and give you the business that you want. Now, in this week's podcast episode of I Hate Numbers, we're going to be exploring and looking at the choice between a sole trader or a company structure for your business. How do we decide, what's the key differences, and how do we go about it?

First of all, let's think about why it's such a big deal between the two choices that we have. There are other peripheral choices, but the main ones for most businesses in the UK and around the world is operating your business as you, as a sole trader, or through the vehicle of a limited company. Now, the reason it makes a difference and has an impact is because it affects lots of different areas. The areas it impacts on is the records that you've got to keep, the type of accounts that you've got to produce for our friends at the tax office and the regulators. Tax, always a key consideration.

The tax that you pay, the tax that you can save, the rules and regulations that you must follow, the level of personal protection that those two different company structures and business structures afford you, and also the cost of running one of those two types of business, and that includes the fees that you'll pay to your accountant during the course of the year and at the end of the year itself.

As a heads up, I will point out that it's quite possible that you could run a variety of businesses, and it may be that you decide to choose a sole-trader activity for one, and you decide to run your businesses, your other business interests through a company. So first of all, let's have a look in terms of what's the key differences between those two structures.

Now, a sole trader is, as the name implies, it's fundamentally you. It's you trading on your own account. There's nothing to stop you taking on staff. There's nothing to stop you engaging freelancers. There's nothing stopping you having large customers or small customers. The key issue is that as a sole trader, the law recognises the business and you as one of the same.

So. if things do go awry, if things do go wrong, so you are giving the wrong advice in your business, you are staging an event, selling a product, and somebody suffers some wrong, then you, personally speaking, are exposed to any consequential liability that may arise. If you have financial challenges in your business and business cash flow suffers,

then you are personally liable for any debts that will build up in your business. As a sole-trader business, however, there is the flexibility. There's less disclosure that you have to make about your activities and affairs. More of that later on in this podcast. The accounting process is more straightforward.

It's much quicker to get off the ground with a sole-trader business, and hundreds of thousands and millions of people in the UK and around the world operate very nicely and effectively as sole traders. Now, I mentioned tax and tax, as I said, is a big key difference, but tax is going to be explored in more details in next week's podcast, but I'm just going to flag that up for now.

Let's continue with where we left off. So, we talked about a sole trader that in business terms, it's fundamentally you. The record keeping is relatively light touch in a sense that you just keep a track of what you're spending. You keep a track of what you are invoicing. You are preparing the accounts for your business, but the actual obligations on you are relatively straightforward.

Now, let's cross over and think about a company. Now, one of the biggest challenges that business owners will face when they create a company is understanding the differentiation and why a company is so fundamentally different. Firstly, a company typically with the suffix, LTD, or PLC, or CIC in the UK, LLC in the US and other countries is a separate legal

entity. The law recognises it as separate from you. The regulators recognise that as separate from you, and all the engagements you have, that company that you create is capable of undertaking contracts on its own account, it can take on liabilities in its own rights. If you decide to retire from the business and you no longer operate and work in your company, your company will still survive

you unless you formally remove that. We typically give birth to a company by completion of requisite forms. We form the company by complying with certain obligations, we submit that, and these days it's relatively straightforward to form a company and it's not an erroneous cost. But as soon as we create that company, let's assume we create a company called I Hate Numbers Limited, in legal terms, accounting terms, and tax terms,

that thing that I created, that virtual entity, that non-physical thing is a separate person. So, what that means is I've then got to wear two hats. During the course of a year, when I invoice clients, it's my company that will be invoicing the client, so it'll be, I Hate Numbers Limited. I Hate Numbers

Limited, will be taking on the debts, receiving invoices from the variety of suppliers. At the end of the year, it will complete a set of documents, a set of accounts summarising its activity. We're not concerned with your financial affairs at this stage, and it'll submit the accounts and tax returns to the regulators Companies House in the UK, HMRC for the tax returns, summarising and paying any tax that might be due

accordingly. There are rules and regulations governing companies, so I Hate Numbers Limited now will be regulated and governed by the Company's Act. Those rules will largely apply, irrespective of the size of company you are. So, if you happen to be listed on the stock exchange, if you happen to be a private limited company, to a large extent, a lot of the rules in the Company's Act would apply to you.

So, there's certainly a light touch regime, but there is a regulation that governs how you can interact with the company, how you can take money out. More of that in a future podcast, but suffice it that the law steps in and says how you should conduct affairs between you and your company. To a large extent,

these are largely straightforward, but be aware of them, and be aware that now in legal terms, your status changes. You are no longer a sole trader. You are the shareholder and director and employee of that beast, of that company you've created. So, in your mind, visualise that distinction between the company that's engaging you to provide the services, to provide the products to your end customer.

Your end customers in reality will be dealing with you as the individual, but it's the company, that intermediary party, that they'll be receiving the invoice from, paying the bills to, and so it continues. One of the biggest reasons why people choose a company structure is because of the protection that it gives you.

That protection means that the company is the one that's responsible for any debts that might build up. The company itself is responsible for picking up the pieces of any wrongdoing that you may create, some of your employees may create. Obviously, within the context of the law, you cannot absolve yourself completely from personal liability, but you have a greater level of protection.

It's the company that's actually engaging that activity. It's the company that's exposed to any obligations that might rise accordingly. Other reasons why people favor company structures is because it has a greater flexibility for tax planning opportunities. It has a greater flexibility for raising funds.

It has a greater flexibility of bringing more people into your business. And if you decide later on in life to move on, to look for different opportunities, look for doing something differently with your life. That company that you created, that has built up a business can be sold on much more easily. I mentioned tax earlier on, and tax certainly is a major consideration.

And when I speak to clients about whether they should form companies, typically they might either start off as a company straightaway, or they might migrate from being a sole trader and forming a company subsequently. Tax is certainly a major consideration and tax will be explored in more detail in next week's podcast.

So, typically, let's summarise this here, the two main drivers between a limited company and assault trader would be the degree of protection that it affords you, your personal assets are protected. Also, tax is a major factor in that decision making process. Whatever you decide to do, think about the business, your objectives, and get the structure that matches that.

Don't think structure first, and then get your business to fit into that. Folks, I hope you've got some value from this podcast. I'd love it if you could subscribe and share it with your friends and colleagues. If you check the show notes at the end, there's a link to some additional resources on forming companies, and limited companies versus sole traders.

Until next week, have a fantastic week. 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.