Stage 1 - How to trade
“One of the first decisions that you will face when you want to start a business is how you are going to trade – are you going to be a sole trader, partnership or limited company?”
A Sole trader is that you are trading under your own name and there is no formal set up for the business or registering of the trading name should you choose to use one. All you need to do is to register with HMRC and to inform them that you have started a business and that you expect to earn money that you will need to pay tax on. You need to do this within three months of starting trading.
A Partnership is quite similar to being a sole trader except that you will be doing it with at least one other person or ‘partner’. The partnership needs to register with HMRC that it is trading and the individual partners need to also register for self assessment if they are not already.
A Limited Company is a separate legal person it can sign contracts, own property and must pay its own tax. The company needs to be opened at companies house and will appear on the register of companies once formed. A company needs at least one director and shareholder to be formed.
An owner of a Limited Company will enjoy limited liability for the company debts, that should the business fail the personal assets of the owners can not be taken to pay the company debts. This does not apply to the partnership and sole trader where there is unlimited liability for business debts. It is important to understand that limited liability will not protect the owners when fraud is present.
A Limited Company must file copies of its account with Companies House every year, these can be in a shortened form, which can be viewed by another company or member of the public.
The main advantage of trading as a Limited Company is that you will more than likely pay less tax compared to a sole trader or partnership. The company is normally taxed at a rate of 19% on its profits and you will take money from the company as salary and dividends with the dividends taxed at 7.5% up to the top of the 20% tax band.
There may be other reasons to trade as a Limited Company if you are a contractor you will need to trade through a limited company and if you are a landlord letting residential properties you may wish to trade as a limited company to be able to claim the mortgage interest as a business expense.