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If you’re starting a business, one of your top priorities is to work out which business type will serve you best. There are many different types of business and all come with specific advantages and disadvantages. The key to the puzzle is to try to find out which business type offers your company the most advantages, whilst limiting the drawbacks.

Sole Trader

Perhaps the easiest business to set up is that of a sole trader. Startup costs for sole traders are low –  all they have to do is register as self-employed. And their accounting tends to be less onerous than it is for a limited liability company. Their self-assessment tax returns tend to be simple to fill out and down require the services of a trained accountant. (Although, if you’re struggling to fill out a self-assessment tax return, hiring an accountant is probably a good idea).

Sole traders are their own boss, and they have full control over their work and their finances. You don’t have to make decisions with anybody else and you get to decide exactly how you run your operations.

However, as a sole trader of you will be personally liable for any debts your business incurs. In the worst case scenario, you risk losing all your assets, like your house and your car, as well as any personal savings.

Limited Liability Company

To set up a limited liability company you’ll have to go through a company like Your Company Formations Limited. These companies will register your company with the relevant national body.

By contrast to a sole trader, a limited liability company is defined as a separate legal entity. This means you’ll get strange letters in the post from the authorities telling you how you should treat this new legal entity. But the advantage of this is that if your business fails, you won’t be personally liable for any of the debt. Limited liability companies are a legal instrument designed to protect entrepreneurs. They don’t have to pay the full price for the risks they take.

Limited liability companies offer several advantages over and above those of a sole trader. For one, a limited company is more likely to be perceived as trustworthy. That is, it’s a form of free marketing that builds a sense of trust before you’ve even done any work for any customers.

There may also be financial advantages, depending on your country’s tax code. Often corporation tax on profits is lower than income tax at higher thresholds. So if you expect your company to make more than a certain amount of money, it may be better from a tax-saving perspective.

Most limited liability companies, including limited partnerships, have multiple directors. If you aren’t a negotiator, or only work effectively by yourself, then choosing a limited liability company may not be a good idea. Whilst running the company you’ll have to be constantly negotiating and making decisions with others. And the other directors and partners may not always agree with the direction you want to take the business.  

 

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