Choosing between forming a company and running your business as a sole trader is often a trade off between (a) the cost of setting-up and administering a company; and (b) the benefits that forming a company brings, such as limited liability.
This page aims to identify some of the positive and negative aspects of operating as a sole trader in order to assist you with that choice.
No requirement to register the business
Sole traders are not required to register their business with Companies House before starting to trade. To set-up as a sole trader simply start trading or carrying out business activities.
* Please note that sole traders must register as self-employed with HM Revenue & Customs, and that specific licenses and other permissions may be required depending on the nature of the sole trader business.
No requirement to register the business name
Despite what you may read elsewhere, there is no requirement for sole traders to register their business name. Sole traders may however benefit from forming a dormant company to reserve a company name until such time as they are ready to run their business with the protection of limited liability.
Legal Clarity would be happy to form a dormant company on your behalf.
Less administrative paperwork than for a limited company
There is less administrative paperwork required when operating as a sole trader as opposed to a limited company.
In particular, sole traders are not required to file:
- an Annual Return;
- annual accounts; or
- a Self-Assessment Corporation Tax Return.
However, a self-assessment tax return will have to be submitted to HM Revenue & Customs each year.
You can convert to a limited company later
Sole traders can convert into a limited company at any time.
You can register for VAT and take on Employees
Sole traders can register for VAT and take on employees. However if you are considering doing either then you should also consider whether converting your business to a limited company at that time would be prudent.
Sole traders have unlimited personal liability
Unlike limited companies, sole traders do not benefit from limited liability. They are personally liable for all of the debts and obligations of their business without limit. A sole trader’s house and other personal assets can be seized to satisfy business debts.
Your business name is less protected
The business name of a sole trader cannot be registered at Companies House. The name is not reserved for the sole trader should they wish to convert into a limited company with the same name at a later date.
Sole traders can however form a dormant company to reserve their business name until such time as they are ready to run their business with the protection of limited liability.
More difficult to seek investment and to borrow
It is harder for sole traders to borrow money and to obtain investment in their business. In particular, sole traders do not have shares to issue to investors.
Don’t accidentally form a partnership
If you go into business with another person to make a profit then you will almost certainly be in partnership with that other person (unless you form a company together).
Each partner is personally liable for any debts that the other partners take on in relation to the business without limit.
Sole traders are almost always one-man-band businesses with a low level of turnover. Your customers will know this. Will this affect your reputation and your ability to attract custom?
Ability to attract customers
In many business-to-business sectors customers will not employ your services unless you operate as a limited company and hold the appropriate insurances.
Continuity and succession
It is much more difficult for the business of a sole trader to survive the death, bankruptcy or resignation of the sole trader. If you want the business to be able to survive independently then you should consider forming a company.