Setting Up Your Business

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Setting Up
Your Business

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Limited Company vs. Sole Trader

If you’re setting up your business, you’re bound to have some questions, like: 'should I incorporate my business or become a self-employed sole trader?' Or, 'what are the structural differences between limited companies and sole traders?'

So, we’ve taken a look at the different challenges faced by sole proprietors and limited company directors. Take a look below to find out more. Or, for advice on what you should consider before you start your own business, click here.



Business Set Up

Sole Trader

If you set up a business as a sole trader, you’ll need to:

- Register for Self-Assessment.
- File a tax return each year.
- Keep digital records of your sales and expenses.

Limited Company

If you’re setting up a limited company, you’ll need:

- A company name and address.
-At least one director and at least one shareholder.
- A Standard Industrial Classification (SIC) code. That’s a four-digit code specifying the nature of your business.

Company Structure

Sole Trader

As a sole trader, you are the business, the owner, the manager, and the staff all rolled into one. While some find this daunting, others relish the freedom and control this responsibility presents.

Limited Company

If you incorporate your business, it becomes a separate legal entity. That means you become a shareholder and serve the company as a director.

Tax & Funds

Sole Trader

If you’re a sole trader and your turnover is above the annual threshold, you must register for VAT.

You’ll also pay Income Tax and National Insurance contributions (NICs) on your business’s profits in the year earned. Because business profits are subject to Tax and NICs, you’ll have no further tax to pay when you withdraw money from the business. You’re also likely to spend less on accountancy fees than if you incorporate your business.

Limited Company

A limited company pays corporation tax on business profits in the year earned. Any salaried income from a limited company is subject to Income Tax and NICs at the time of payment. But, as the director of a limited company, you decide when and how to make payments and when to distribute profits. This might allow you to gain certain tax advantages. For instance, you can choose to pay shareholders’ dividends if profits remain after tax. Furthermore, you can also take your pension as a tax-deductible expense too.

Financial Liability

Sole Trader

In the unfortunate event that the business has a legal dispute, or worse still, if the business fails and owes money, as a sole trader you’re the person accountable.

Limited Company

Limited company finances are detached from your personal finances. By separating things like records and accounts, you’ll insulate your personal finances from that of your business. This limits liability and can help with tax. Incorporation also enhances protection over your personal assets and credit rating should your company get sued or fall into financial trouble.

‘Start me up’: How to set up a business

Setting up your own business is a life-changing decision. But it’s one that has the potential to be very rewarding, both for yourself and your family. That said, starting a business is not without complexity. Fortunately, with over 20 years’ experience in growing and developing start-ups and small businesses - including ourselves - Danbro Business are here to help you with the formation, growth and success of your new company.

What’s the best thing about starting your own business?

What happens if I incorporate my business?

Incorporation is the process of a new business or existing sole trader registering as a limited company with Companies House. Incorporated businesses are separate legal entities. Their identity is distinct from the individuals who run or own them.

When you incorporate your business you become a shareholder - and director - of a limited company. Where there are other shareholders involved, you’ll need them to agree to create the company and its written rules before incorporation. These rules are often referred to as ‘memorandum and articles of association’. Once that’s taken care of you can register your company online with Companies House.

As a limited company director, there are certain obligations you need to fulfil. For instance, you’ll need to inform Companies House about any changes to the business. This includes the appointment or resignation of another director. Limited company directors are also obliged to prepare and submit annual accounts to Companies House. A company tax return, along with your financial accounts, must also be filed online with HMRC. Furthermore, details about your limited company will float in the public domain. That means third parties can access documents filed at Companies House.

As a sole trader, there are no legal requirements to publish such information.

Should I incorporate my business?

Incorporation is not compulsory and for many, sole proprietorship works just fine. But, to bring in co-ownership, for instance, a business needs to be incorporated. It also tends to be a little easier to get funding for a limited company than it is for self-employed sole traders. Transferring the ownership of your business is more straightforward as a limited company shareholder too. So, when you come to retire, decide to sell, or in the unfortunate event of your passing, succession is easier than it is for non-registered businesses.

Before you decide whether to incorporate your company, it’s always a good idea to speak to an accountant or business specialist. They’ll help you determine the best option for you and your business moving forward. To spare you the rigmarole, Danbro Business can take care of all this for you. After all, it’s what we do best.

Choosing a business name

As a sole trader, you don’t need to register your business name. You can trade under your own name, or one you choose for your business. Remember though, you cannot include the words ‘limited’, ‘limited liability partnership’, ‘public limited company’ or the abbreviations ‘Ltd’, ‘LLP’ or ‘plc’.

On the other hand, if you set up your own limited company, you must choose a business name to trade under. You need to ensure that the name you choose is not the same as a pre-existing trade mark. To see if the name you’d like to use is already trademarked, click below.


Start your business with Danbro Business

At Danbro Business, we believe that building a successful business is about more than just balance sheets and profit margins. Whether you’re a sole trader or the owner of a limited company, we want to help you grow your business at a pace that suits you. From incorporation and company set up, to tax returns and financial planning, our comprehensive start-up service can help you do exactly that.

So, for industry-leading, cloud-based technology combined with traditional, tailored accountancy, launch your business with Danbro Business.  

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