Registering as a company – the pros and cons

When first setting up a business there are many issues to consider, not least what whether to register as a company or not.

In simple terms, there is no legal requirement that you must register as a limited company – you can run your business as a sole trader. ‘But there are some significant advantages to registering your company, especially when it comes to what tax you’ll be paying,’ says Stewart Masterton, a business adviser from Business Link for London. ‘So, you may decide to register even though it’s not a necessity because it will be of benefit in the long run.’

Firstly, some people prefer to operate as a sole trader because it fits with the style of their business, especially in the case of market traders. ‘It also depends on the nature of your relationship with other companies, such as your suppliers,’ says Masterton. ‘And if you plan to expand you business beyond one stall you may wish to lay the groundwork now.

‘It’s worth considering the issue of liability,’ he continues. ‘As a sole trader, you are liable for anything that happens to the business, whereas registering as a company will limit your liability to your shareholding or the value of your equity in the business.’

It’s also worth bearing in mind that, in general, business tax on profit is much less that the equivalent personal tax rate. Masterton says: ‘As a sole trader, all profits are taxed at the personal rate, but if you register your business as a limited company, only the salary you pay yourself is affected. The profits are then taxed separately at a business rate. Registering your company could therefore significantly reduce your tax bill.’

Whether you decide to register your company or operate as a sole trader, Masterton advises all start-ups to consider VAT issues in the early days. ‘Keep an eye on your income forecasts and make the decision whether to register for VAT early. Even if you expect your income to fall below the VAT threshold, keep accurate records, especially as some of your suppliers will be VAT-registered and some won’t. If and when you eventually need to register, it will be much easier if your paperwork is in order.’

More information: Registering a company name – a Small Business guide

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