Starting in Business - Sole Trader or Company?
Posted by Suzanne Fogarty on February 01 2011 @ 12:24
In these difficult economic times a lot of people are starting or considering starting their own businesses either as a way of generating some additional income or to replace a source of income that no longer exists.
Starting your own business is very exciting, but can also be quite daunting. For a lot of people the choice between operating as a sole trader and forming a limited company through which to operate their business can be very confusing. There are a couple of key considerations which you should give thought to before deciding to go one way or the other.
Do you expect to need all of the income generated by your business to live on?
How important is "Limited Liability" to your business?
These are two very important questions because they highlight two of the main benefits of running your business through a limited company. If there are surplus profits in your company that you do not need to fund your lifestyle then it is possible to put that money to a tax efficient use by putting a company pension scheme in place and having the company make contributions to that scheme on your behalf. Such contributions are a tax deductible expense for the company and so are effectively tax free.
For some businesses, the benefits of Limited Liability are crucial and this on its own may be enough to warrant the running of their business through a limited company from day one.
If your business is unlikely to generate surplus profits for the first few years then maybe you should give consideration to starting your business as a sole trader with the objective of incorporating further down the line. This has the benefit of postponing the costs associated with incorporation until your business is established.
Any losses that you incur as a sole trader during the first few years should be used in full against future profits before incorporating the business to ensure that you benefit in full from the losses you incurred.
If you decide to go ahead and start your own business, see our next blog - Top 3 Tips for Starting a Business.