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Sole trader benefits – 8 advantages of being a sole trader

Operating as a sole trader does exactly what it says on the tin – you are running your business as an individual and there is no legal distinction between you as the owner and the business itself.

It’s the most popular way of starting a business in the UK, so let’s look at some of the reasons why that is:

8 sole trader benefits to consider

1. It’s quick and easy to get started

Setting up as a sole trader is the quickest and simplest way of working for yourself, with no need to register a company at Companies House. All you need to do to get started as a sole trader business is tell HMRC that you are self-employed.

2. You are in control

As a sole trader you are 100% in the driver’s seat of your business. With no other directors, shareholders or partners to answer to, you don’t have to compromise on your strategy or vision for the business.

3. You can be totally flexible

Flexibility goes hand in hand with control. Being the sole decision maker gives you the agility to react quickly to adapt to changing circumstances, such as fluctuations in customer demand and needs.

4. There are fewer statutory obligations

Being a sole trader comes with considerably fewer obligations and paperwork than running a limited company, with no need for formal annual accounts or a corporation tax return and no Companies House responsibilities. However you will need to submit a self-assessment tax return which shows your profit and loss and balance sheet – so you will still need to keep the books.

5. Accounting is simpler

Although you still need to keep records of invoices and expenses for your tax return, the accounts of a sole trader business are simpler than that of a limited company. As your affairs are simpler, this may mean lower accounting fees.

6. Financial upsides

As a sole trader you retain all the profits from your business. In addition to this you can offset any trading losses against your personal tax bill, going back up to 3 years.
Another financial benefit is that you may retain personal ownership of assets used by the business – although this also means that any liabilities are also yours.

7. Your privacy is assured

When you run a limited company, Companies House information is publicly available, so anyone can see details of you as a director and access your accounts to see how your business is doing (although if you are a small business the amount of publicly available information can be very limited). As a sole trader none of that information is in the public domain.

8. It’s simple to shut up shop

With a limited company there are formal steps for winding up and dissolving the business and this can be a lengthy process. With a sole trader you can simply cease trading as and when you want to (although you will still need to include the final figures in your self-assessment tax return).

Is being a sole trader right for you?

Just like any other type of business structure, being a sole trader has its downsides.

Notably, sole traders have unlimited liability and you and the business are one and the same. This means, if the business fails, your home and personal assets could be at risk.

You should always weigh up the pros and cons of what is right for your business.

Sole trader FAQs

Can you employ someone if you are a sole trader?

Although sole traders operate the business by themselves, it doesn’t mean they have to work alone. As a sole trader you can employ staff but you must ensure you meet all the legal obligations of doing so.

What are the risks of being a sole trader?

Far and away the biggest risk faced by sole traders is the fact that your business finances are not separate from your personal finances, so you have unlimited liability. As well as this some clients may only deal with limited companies, so you may risk losing out on work if you are a sole trader.

What is a sole trader responsible for?

Although working as a sole trader comes with fewer responsibilities than setting up and running a limited company, there are some. You must inform HMRC that you are self-employed and register for self-assessment. You will also have to pay self-employed national insurance contributions and register for VAT if you reach the registration threshold.

5 biggest mistakes when forming a UK company

Forming a new company is an exciting time for anyone. Over the years, the UK authorities have made it easier than ever to open a company. You don’t need to fill in lots of forms and send them to Companies House. It’s a matter of using their online portal to form your company.

Once you have finished, and your company has been accepted, you will be requested to print out various forms. This is will confirm that your company has been officially incorporated. It may sound too easy, but there are no hidden catches here.

But what are the biggest mistakes people make when doing this?

Forming the Wrong Company

There are many company types you have to take into account. The average small business will be better off forming a company that allows them to trade as a sole trader. It may be good to have a limited company, but limited companies come with far greater reporting responsibilities, and this extra work doesn’t always pay dividends.

You can form practically any type of company online. Make sure you do your research and don’t form a certain type of company on a whim.

Not Specifying the Shareholders

Technically, you can have as many people as you like working for your company, but if they own any part of that company they have to be mentioned. Shareholders don’t work in the same way as they do in other parts of the world. With a private limited company, for example, the shares are valued at what you say they are valued at, and you can dole them out as you please.

Only public companies have shares that are traded on the open market, and the company needs to generate enough revenue in order to become this type of company.

If you are sharing the company with someone else, they must be mentioned when you form your company, or at least added afterwards. Adding them before the company is formed will involve them placing their names on the Memorandums of Association, which is essentially an agreement to form the company.

How the Company is Run

This is where people tend to start making errors. Dictating how the company is run is a deceptive task because people assume it refers to the day-to-day running of the company. For most companies, they will use what’s known as ‘standard article’. These are a basic legal model that can be inserted via the Companies House website.

You can change this, but by doing so you are waiving your right to register your company online. The vast majority of companies have no business changing these.

Choosing the Wrong Company Address

The company address is more important than you think. It’s where official communications between the UK government and you will be sent. It doesn’t have to be the offices you are operating out of. You can use your home address. The only restrictions are that it must be in the company’s home country, and it has to be a physical address; so you can’t use virtual addresses.

What a lot of people don’t realise is that this address is available to the general public via the official register of the companies of the UK. Make sure you are comfortable with this before choosing your home address.

Failing to Register for Corporation Tax

Sole traders don’t have to worry about corporation tax, which is why most prefer to register as this type of company. If you have decided to start a private limited company, you have a legal duty to register for corporation tax within three months of forming your company so you can begin trading.

Without registering for it, you are legally unable to begin trading. And even if you never earn enough to actually pay corporation tax, you still have to be registered for it and you still have to file.

Conclusion

The responsibilities of a company director are to file your company right. By avoiding these mistakes, you can avoid running into trouble. What are the biggest challenges you have faced when trying to form your company?

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Sole Trader or Limited Company?

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Read extract or Click on Logo below to watch video: This guide examines the main differences between a business run by a sole trader or as a partnership and a company, managed by its director/shareholder. This comparison is for a trading business. Many of the points summarised here are not relevant if you want to compare individuals or companies managing investment businesses. At […]

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