When individuals decide to set up a business, a critical part of the process is selecting an appropriate structure. Typically, this involves choosing between registering as a company or as a sole trader.
The structure you choose can impact how and who you can raise funding from, the extent of your liability as the owner and how you or your company pays tax. As a result it is advisable to see the advice of an Accountant before making any decision.
For now though, we will cover the basics and let you in on the differences between a company and a sole trader.
What is a sole trader?
A sole trader is popularly referred to as a sole proprietor. It is a business structure that is quite simple because a single individual is charged with the responsibility of owning an entire business and running it.
Sole traders have legal responsibility of every aspect of their business including the finances. This structure means that the sole proprietor gets to keep all the profit and the same principle applies to losses incurred.
What is a company?
A company can be described as a legal entity that permits an individual or a group of individuals to apply for the creation of an independent organization as shareholders. A company is empowered with certain legal rights and can pursue set objectives. These rights include borrowing money, hiring employees, owning property, to sued and be sued.
The major players in a company include directors and shareholders. The members of a company or its shareholders are the owners while the directors are simply managers.
Difference between a sole trader and a company
There are many differences that exist between a sole trader and a company, the major ones are as listed below:
Why register as a sole trader?
Setting up a business is a popular option because of its various benefits. The following are some of the reasons why you should register as a sole trader:
Deciding to operate as a sole trader provides you with full control of the business you own. This means that you are not obligated to consult shareholders or directors, you do not have to compromise any vision you have for the business etc. This allows you to develop a business as you see fit.
Sole traders enjoy operational flexibility because they make decisions on their own. Effecting changes to a business with this structure is simple and quick so that it can successfully adapt to changing circumstances. For instance, changes can be effected on products offered and prices.
Quick set up
The process of setting up a business as a sole trader remains to be the simplest and quickest. Often it involves filling out a few forms with your a Government Authority and obtaining a Business Number.
Unlike a limited company that requires one to employ the services of a solicitor or a formation agent, to register as a sole trader attracts low set up costs. This is because the cost of hiring professional advice is completely eliminated in most cases. Furthermore, sole proprietorship often do not require substantial capital in their initial stages as they are typically smaller businesses or focused on a smaller geographic area.
Sole traders have simpler accounting processes compared to limited companies. As a sole trader you do not need a Corporation Tax Return or formal Annual Accounts. Nonetheless, they need to maintain records of expenses and invoices. In addition, sole traders must submit personal Self-Assessment Tax Returns.
A sole trader compared to a limited company, has fewer responsibilities regarding statutory filing. Furthermore, this structure do not need to maintain a suite of statutory registers like limited companies.
Sole traders retain all profits that their business makes. They also retain ownership of business assets.
The financial information of a sole trader remains private unlike the published accounts of limited companies. This provides less information to competitors that might be interested in your secrets for success.
Why register as a company?
There are many limited companies that have been incorporated all over the world, the following are some reasons why you should register as a company:
Registering your business as a company is beneficial because it provides the option of selling it in the future. This can be a challenge with other business structures like sole proprietorship, given they are tied to you as an individual.
A limited company is very easy to start in the modern day because it is possible to do it online. A process that could take several weeks can be completed in a matter of hours.
Limited companies have their own legal identity. This means that third parties get into contracts with the company rather than individual shareholders and directors. Therefore, shareholders and directors can change, and companies can continue with operations after owners die.
Prestige and potential credibility
Formation of private limited companies suggest commitment and permanence of a responsible and effective management. It provides customers and suppliers with confidence. Ultimately, this translates to new business opportunities.
Companies pay corporation tax while sole traders pay income tax. Generally, the rates of corporation tax are relatively lower compared to those of income tax. Companies may also benefit from various government programs and tax incentives aimed at increasing innovation or boosting exports from their country.
Raising new capital
Companies can raise capital by issuing new shares to investors. These new shares can be offered to either new investors or existing shareholders, who contribute additional capital to the company. This money can then be used to fund future growth, to enter new markets or expand a product line.
A company’s shareholders have capped or limited liability concerning the debts of the business. This liability heavily depends on the amount paid for shares as well any unsecured loans made to the name of the company.
Also published on Medium.