Many seem to fail to understand what a Company is. Some say they have a company but do not. Some get the accountant to set one up but never really understand what they have created. You should not leave these things to any professional but make sure you as the business owner you understand the details.
1. What is a Company?
It is a newly created legal entity separate from any person .
It is created through Companies House and is given a registered number, address and at least one appointed Director
2. What is the difference from being a sole trader where you are James Brown trading as Preston Homes and being Preston Homes Ltd.
James Brown is personally liable for all debts incurred by Preston Homes. Creditors can take his home and make him bankrupt.
A Company is subject to far more rulesand regulations than a sole trader regarding how the business is run and what tax is paid.
If James Brown is a Director of Preston Homes he is an employee subject to PAYE even if it is his business and he is the sole shareholder and director.
3. Why do accountants tend to advise a new business owner to start as a sole trader?
The record keepingand tax rules are easier.
The tax payable is likely to be lower. A sole trader completes a self assessment tax return setting expenses against income and pays tax on income above their personal allowance. A company pays corporation tax on its profits. The directors are subject to PAYE. Dividends are only tax free up to £2000.PA.
4. What should a business owner choose?
It is a choice for each business owner to take on the individual facts in each case.
The benefit if limited liability for the owner should be balanced against the lower costs and tax benefits of being a sole trader.
They should consider how risky the business is. This is from the inherent nature of the business being carried out eg medical businesses are generally more risky than making cardboard boxes.
This is also how well funded and generally financially sound the business is. You should have a cash flow forecast to make sure you do not run out of money . You should also complete a plan to see that the business product or service is itself very profitable or just marginally so.
You should consider your own circumstances. a single person may be more willing to take a risk than someone with a family.
Ask your accountant what your tax position will be as a sole trader and a company then balance these against the benefit of having limited liability.
5. What legal matters should you consider if there is more than one Director or Shareholder?
Directors as employees need agreement setting out what their role is and what their reimbursments will be
Shareholders need an Agreement setting out what their roles will be , what is done if they wish to sell their shares or a dispute. If you have 50% of the shares each you need a mechanism if you disagree so the business does not grind to a halt.
Every Business Owner needs to know and understand these things. It is your business.