Setting up a limited company will mean more administration and more paperwork than if you are a sole trader but there are many advantages to being a limited company, not least eliminating and personal financial liability.
When a sole trading business fails then the owner is personally responsible for any debt, which can have a negative effect on your credit rating and ability to obtain personal loans in the future. You could risk becoming personally bankrupt if the debts are too high for your to pay off.
If you set your business up as a limited company you are protected from this risk.
Why set up a limited company?
A limited company is a legal entity so the finances of limited companies are completely separate from the finances of its owners and directors.
If a limited company fails the owner/director will, of course lose the money they personally invested in it but will not be personally liable for any debts incurred by the company.
Aside from the financial protection that a limited company affords it will also make you appear more professional to potential clients, customers and investors.
How to set up a limited company?
Setting up a limited company in the UK is not as difficult s you might imagine. You can register online with Companies House and follow the registration process yourself. If you would prefer a professional to do this for you then your accountant or solicitor will do so.
The process requires submitting a memorandum of association, articles of association and some other forms – all of which are available online or via a reputable stationery company. It is also possible to buy, inexpensively, a ready made company – simply search online for one of the many company formation providers. This is a good option but depends on being able to find an existing name that is appropriate for your business.
Every company must have at least one director who is 16 years old or above; and it used to be necessary to also have a second person as the company secretary but since 6 April 2008 this is no longer a separate role so just one individual is required to set up a limited company.
In most small companies, the duties that were previously those of the company secretary were minimal and can easily be done by the company director.
Company directors are shareholders in and employees of the limited company so are required to pay income tax and Class 1 National Insurance contributions (NICs) on the salary they receive from the company. They are also required to submit their own personal self-assessment. It is common for cpmpany directors to minimise their personal tax liability by paying themselves a small salary and receiving additional income in the form of dividends from the profits the company makes.
Accounts must be prepared each year but most small companies are not required to have them audited so the process is relatively simple, especially now that the process can be done online.