Starting a business; Do I setup as a sole trader/partnership or as a Limited Company?

This is one of the most important questions a new business owner should ask when setting up a new business.

It’s all so easy to get carried away with the excitement of setting up a new business whether as a sole trader or in partnership with a long time best friend, but when it all goes bad, that’s when things start hitting the fan.

The following is some pointers that may help a new business start-up, or even provoke the thought process for some existing businesses.

1. Although there are various considerations before forming a limited company of which taxation is one, I believe one of the most important is risk of business failure.

2. What is the risk that if things go wrong and you are made bankrupt and lose your home.

3. What is the risk that if your partner runs off with the money and you are left to try and pay the VAT bill or the HMRC PAYE bill. Believe it or not, this is a very common occurrence.

4. What is the risk of your business failing and what do you stand to lose? For example, if you have signed up for a leased premises and your business does not do well, the landlord will most likely come after you for the rent for the remainder of the term of the lease. That could be 5 – 10 years depending on the lease. If you don’t pay then the landlord will make you bankrupt, especially if you have a personal property such as a house.

5. It’s surprising how many business owners signup for leases without proper legal advice.

6. I have come across many business owners who don’t give this proper consideration before it is too late.

7. Another point is that if you do not pay HMRC the PAYE deductions for your employees or the VAT due, you will be made bankrupt by HMRC. This is becoming more common.

8. Saving of taxes is just one consideration, protecting yourself from bankruptcy is a huge consideration.

9. Many people will say there are many additional costs of running a limited company. Well, what are these costs and let’s put them into prospective.

10. Whether you are a sole trader or operate as a limited company you still have to file a personal tax return.

11. Whether you are a sole trader or a limited company you still have to file VAT returns and pay paye for your employees (assuming you are vat registered and have employees).

12. Whether you are a sole trader or a limited company you still have to prepare accounts.

13. Whether you are a partnership or a limited company you still have to prepare accounts.

14. A good accountant will not charge you much more than the cost of a sole trader accounts.

15. The only real additional costs are forming a limited company, about £75. Filing an annual return at Companies House, £14 per year and filing an annual corporation tax return, at the most costing £100 for a small company.

16. Some people say if you file accounts at Companies House, everyone will know about your affairs. Well, filing accounts at Companies House, as a small business (sales less than £6.5m) you only need to file an abbreviated balance sheet with some supporting notes. That’s hardly going to tell anyone very much about your trading affairs.

17. So this is a small price to pay for peace of mind and protecting yourself from bankruptcy.

There is a big mis-conception out there, (even with professionals) that in a bankruptcy a person’s home is protected. THAT IS NOT THE CASE; THE WHOLE POINT OF SOMEONE MAKING YOU BANKRUPT IS TO GET AT THE EQUITY IN YOUR PROPERTY.