This is the first in a series of articles on running a company, covering issues that come up with clients on a regular basis.
When starting a business, one of the first decisions is choosing its legal structure. The most common options are sole trader, partnership, or registered company. Let’s look at each briefly before exploring why you might opt for a company.
Sole Trader
This is what most people mean when they say “self‑employed.” I wrote a little more about this here. You work for yourself, whether freelancing, consulting, or running your own business. It’s simple to set up, with minimal paperwork and low administrative costs.
Partnership
A partnership is essentially a group of sole traders working together. It involves more admin - each partner must file a tax return, and the partnership itself must file one too. Profits can be split however the partners agree, and those agreements can be changed over time.
Registered Company
A registered company is a separate legal entity. Unlike sole traders or partnerships, there is a clear distinction between the business and its owners. This brings both advantages and responsibilities.
Advantages of a Limited Company
- Limited liability: Your personal assets are protected if the business runs into trouble.
- Tax efficiencies. By paying yourself a combination of salary and dividends, it's possible to reduce your tax liability. You can also potentially reduce the amount of National Insurance contributions that you need to make.
- Financing: Banks and investors are often more willing to lend to companies, and you can issue shares in your company to would be investors.
- Working with others: A company structure offers flexibility and protection when going into business with partners.
- Separate legal entity: The company continues even if ownership changes, unlike a partnership which dissolves if only one partner remains.
- Selling the business: Shares can be sold in part or whole, making it easier to transfer ownership.
- Professional image. A limited company might be seen as more professional. This may help you to secure work in some fields where customers may only contract with registered companies.
- Name protection: When you register with Companies House, your company name is legally protected. This is not the case if you are a sole trader.
- Income timing: You can choose when to take salary or dividends, allowing for reinvestment or tax‑efficient planning.
- Allowable expenses: Companies can claim certain deductions sole traders cannot, such as full mobile phone costs or pension contributions.
Downsides to Consider
- Extra cost: Whilst a limited company can be a tax-efficient way of operating, this is only the case if you are making enough money for it to be so.
- More complex admin: Running a company involves more paperwork, though an accountant can handle most of it for you.
- Reporting requirements: A registered company must file annual accounts, a company tax return and a confirmation statement to complete – and you may still need to do your own personal tax return on top of this.
- Reduced privacy: Company details, including registered address and some financial information, are publicly available at Companies House.
Final Thoughts
Running a limited company isn’t right for everyone, but for many it offers protection, flexibility, and opportunities that sole traders and partnerships don’t. In future articles, I’ll cover the responsibilities of directors, explain common jargon, and explore practical aspects of company management.
