We’ve looked at running a business as a soletrader. Here we consider the main alternative for a business run by a single entrepreneur, namely a limited company.

Company

The difference with a (limited) company (compared to a soletrader business) is that this is actually recognised as something separate by the law i.e. you and your company are not the same. You will own the company (by holding shares, and so will be a “shareholder”), and will also be an employee, or rather as is usually the case, a “director” of the company. You therefore have two relationships with the company - you own it, but also work for it. The distinction becomes important for tax reasons.

Positives and negatives

The company’s separate identity then affords you personally some legal protection in respect of debts etc (these are the company’s and not yours), although as a director of the company you don’t completely escape all consequences, for example, if the company fails.

The negatives include greater legal requirements and responsibilities. There are rules governing how the company is set-up and how it can be shut down. Accounts must be filed at Companies House, and so are available to the public, which is not the case for a soletrader.

As it is the company that makes money, not you personally, you will need to extract this out before you can spend it personally. This means the company pays tax on its profits, but you will also have to pay tax if you receive a dividend (in your capacity as shareholder) or salary/bonus (as a director). More of this another time.

So, it can become complicated with a company, but the limitation on your personal liability and also the perception in your market may ultimately mean that you think a company is appropriate for you. However, bear in mind that while relatively easy to start as a soletrader and later become a company, the reverse is much harder (and costly).

Therefore, we cannot stress enough how important it is to discuss the right business structure for you with an accountant or lawyer.

As with all our information in The Business Lounge, this is not comprehensive business or legal advice, and may not apply to your specific circumstances; to discuss how these issues affect you, talk to your lawyer or accountant.