As a new business owner working independently, once of the first things you will need to decide when setting up your business is whether to run it as a sole trader or via a limited company. It is important that you structure your company appropriately for the work that you will be doing.The format you choose will depend on a number of factors, including how much money you expect to make, and what you want to do with it. Setting up a limited company can offer tax benefits, protect your personal assets and create a more professional impression of the company.
This is the simplest route if you are the only owner of the business. However there are certain obligations you must fulfil with HMRC, and tax obligations you must meet. As a sole trader you keep all profits after tax, but you are also personally responsible for any losses your business might make. There is no distinction between you and your business, so you bear all legal and financial responsibility.
Setting up a limited company requires more administration than registering as a sole trader, but can be less of a risk in the long term. A limited company is a separate legal entity to its directors, which means that the company is responsible for everything that it does, separately to you as an individual. Any profits belong to the company, rather than you, so you are paid as an employee.
The company can share its profit, after tax, amongst its shareholders as dividends. The director(s) are responsible for running the company and usually own shares, but are not personally responsible for any losses the business may make.
If you choose to operate via a limited company, our free Guide to Working through a Limited Company is a great place to start, with everything you need to know on running you company from forming the company and registering with HMRC, to paying yourself a salary and filing accounts.