Once someone decides to start a business, one of first questions they often ask is whether they should set up a company. A company is one, but not the only way in which to run a business, and here The Business Lounge looks at why the business structure is important, and at the more basic soletrader structure.

Consequences

The choice of business structure is important as amongst many things it will then affect:

• which taxes you have to pay, when and how much
• the laws under which the business must operate
• the records you must keep, and the accounts and returns that must be filed
• whether you will personally be liable for debts of the business
• how you can involve other people in your business
• what happens if you want to stop or sell your business
• and possibly how you are perceived by customers, suppliers and competitors.

The tax differences in particular are great (and by “great” we mean “big”, and not “brilliant”) but we’ll save those for another day. Firstly, you need to know what a soletrader business is (explained in this article) and what a company is (covered in the next article).

Soletrader

This is a term used if you start running a business using no other legal structure i.e. you raise invoices in your own name, and your customers pay you (hopefully). This is often how people begin, but just because it is easy to slip into, doesn’t mean you don’t have legal responsibilities. For example, you are required to register with HM Revenue & Customs within three months of beginning to trade, and so begins your relationship with the taxman, and all the forms and payments this will demand.

Positives and negatives

The positives are that it’s probably the simplest way to get going, and all the profits you make (after tax) are yours. If you make losses as you set up, you may also be able to reduce tax on other income as a result.

The negatives are mainly due to the fact that you and the business are not separate in the eyes of the law. So if the business has debts, you will be responsible for them. If a customer or supplier sues the business, they are actually suing you i.e. you are not personally protected.

In contrast, a company does offer you protection in the form of “limited liability”. Read our next article to find out what this means and the other advantages and disadvantages of a company compared with a soletrader business.

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.