Registering your business: sole trader or limited company? 

Here, we speak to four small business owners about the decisions they faced when registering their company and what influenced their choices.

Registering your company is one of the first procedural steps you will face as a company owner. It gives your fledgling enterprise a certification of legitimacy; an exciting time indeed! But there is a key choice to make: sole trader or limited?

These company owners remember their own starting point and talk about such a pivotal decision and its impact on their business’ future.

Elizabeth Malone Johnstone, director, Digitise this

When I first registered as self-employed with HMRC, I originally set up as a sole trader, trading as ‘Digitise this’. I had done quite a bit of reading around the subject and knew that this route would be quicker and less complicated than registering a limited company.

“I knew that there was nothing to stop someone else registering a company in my name, so I registered Digitise this”

Limited companies are separate legal entities and come with strict requirements like submitting annual accounts and returns, all of which seemed far from straightforward for someone starting their first business.

I was also very uncomfortable with the idea of my name and address being registered as a director in the public domain, along with my company accounts. Sole traders can retain their privacy and as a fledgling business I felt uncomfortable declaring my new company to the world until I was more established.

However, I knew that there was nothing to stop someone else registering a company in my chosen trading name, so I registered Digitise this.

I work with businesses, most of whom are VAT-registered, so after a few months I registered for VAT, in order to claim back VAT on any business costs.

Towards the end of my first year in business, I decided it was time to work as a limited company. It was partly a perception thing but mostly I knew I wanted to eventually expand the business beyond myself.

Looking back now, it was a total headache to move from a VAT-registered sole trader to a VAT-registered limited company.

Changing from a VAT-registered sole trader to a VAT-registered limited company a headache

I spent many painful hours on the phone to HMRC, completing and resubmitting forms and generally tearing my hair out.

I had to set up a new business bank account for the limited company which made my accounts more complicated for a few months.

Even after that I have to keep the old bank account open as I still get the odd client paying into it, despite repeated reminders. The change of legal entity also voided my professional indemnity insurance which meant additional hassle and cost to arrange for new cover.

My advice to anyone starting out would be to decide from day one whether you will be a sole trader or go limited.

Whether your customers are consumers or businesses will have a bearing, as will your longer term business goals and exit strategy, if you have one.

If you are building a brand and plan to expand and/or sell the business one day, then a limited company may be a better option. Get advice from an accountant from the beginning.

See also: What is the definition of a Sole Trader and being Self-Employed

Brian Lonsdale, managing director, Smarter Digital Marketing

The company was set up as a limited company so that if the business was to incur debt and go bust, my personal situation would not be impacted negatively. I also chose this option as it allowed me to bring in another director and divide company shares up.

I felt this was a better approach than a sole trader as it allows room for expansion and growth in the future. This was an easy process and only cost me £15.

I received my company certificate from Companies House within two weeks. I would advise entrepreneurs to think carefully about what their goals are for the business as this will influence how you set up the business.

Graeme Thomas, owner, Johnny F Designs

I started my company in 2007 as a sole trader. This was the easiest of the choices at the time and meant very little work to set it up.

I simply called HMRC, told them I wanted to start trading under Johnny F Designs as a sole trader, and that was it.

Being a sole trader was brilliant, there is very little paperwork and you only need to send off your accounts once a year in your self-assessment tax return.

Everything can go into your personal bank account, and I managed with an Excel spreadsheet to keep on top of my accounts.

Years later it got to the point that I needed to go limited. This was partly because of revenue, but also because I wanted to buy a house, and it really isn’t easy to get a mortgage as a sole trader.

Self-employed people can struggle to secure a mortgage

As a company director however, the lenders seem a little bit more lenient. Some people seem to think setting up a limited company is daunting, but to be honest, it was really easy.

I went onto the Companies House website and registered a new Limited company, it took about 20 minutes and cost roughly £20.

There is, however, more paperwork, and you have to get an accountant to do your tax return. I use a chartered accountant which costs about £1,200 a year, so that is worth factoring into your decision.

You can however do your own annual return and tax/VAT payments. This is more work, but it saves me a lot of money on secretarial and bookkeeping costs.

See also: Tax advantages of a limited company or sole trader?

Mahin Khawaja, founder, Adroit Accountax

To my surprise and probably that of many others, setting up a business was relatively straightforward and quick. To register a limited company it’s important to have a distinct name that sets it apart from literally one million others (Companies House registered business 1,000,000 on the 11th of February).

We provide clients with an Internet link where they can easily check to see if a desired name is available.

Companies these days are formed using standard documents that are relatively very cheap, however, if a small business owner is getting further investment they might wish to take legal advice and may get bespoke Articles of Association.

Further reading about setting up a company

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