Differences Between a Limited Company and a Sole Trader
As a freelancer, contractor, or small business, it is very typical to start with the simple structure of operating as a Sole Trader. While taxes and other administrative work may be relatively easy when you are a Sole Trader, as your volume of business goes up, there are more and more reasons to take on the task of becoming a Limited Company. For instance:
A Limited Company protects your personal assets. If you are found liable in a lawsuit, only your business assets are at risk.
A Limited Company is usually more tax efficient than being a Sole Trader.
Once you have your name chosen as a Limited Company registered through Companies House, no one else can take your company name.
Luckily, running a Limited Company doesn't have to be exceedingly complex, though following a set plan will help to keep the complexity to a minimum.
Choose Your Type of Limited Company
The two main types of Limited Companies are Public and Private, also known as PLCs and LTDs. Public companies tend to be larger, with share capital of at least £50,000, as well as a variety of necessary roles including two directors, two or more shareholders, and a company secretary. As your company grows, you can talk with a business accountant about whether other forms of Limited Company make more sense for your business as well, but it pays to choose the right structure from the beginning, since re-forming a company costs time and money.
In many cases, for these reasons, your Limited Company will be a private one, where you are the sole Director. This term can seem a little daunting, but if you understand your role completely, it is much easier to make sure you accomplish all you need to do in order to move your company forward.
How Forma Can Help You Set up Your Company
Forma is a great example of an all-in-one solution that offers much more than just accounting services. For instance:
We work with both Sole Traders and Limited Companies, so we are ideal for the time when you are starting out and may want to launch your Limited Company in the near future.
Our combined, software-driven solutions help you spend as little time as possible on the admin work of sending invoices and processing payments and as much time as possible on your value-added business propositions.
We make the paperwork and forms easier and make sure you know exactly which documents you need.
We make sure there are no missing steps and help you navigate the process every step of the way.
If you don't have an official office space, we can help you get set up with a virtual office.
We will understand the kinds of business insurance that make sense for protecting you and your assets.
More importantly, joining Forma is joining a community of experts who can help you decide what the next growth opportunity for your business may be, through the use of a variety of valuable articles, tools, and calculators.
Understand Accounting Documentation: Invoicing and Expenses
The fundamental building blocks of solid accounting are those of invoices for work completed and expenses incurred in order to produce the work. In a profitable company, the invoiced payments outweigh all the expenses and create a profit. Most people have accounting software for managing these items, keeping everything in one place so that you can quickly and painlessly generate needed reports and tax forms. However, if you've never been very good about keeping track of these items, now is the time to start. Before you even initiate the process of becoming a Limited Company, set a system for organising and maintaining invoices and expenses such that you can access them easily, including:
Who are your clients? Maintain clear records for each customer.
How do you bill them? Retain electronic copies of every invoice you send.
What are the costs of doing business? Retain receipts or electronic purchase orders for all business-related expenses that can be deducted on your corporate tax return.
This is also the time to find a trusted accountancy that specializes in freelance, contractor, and small business income. In many cases, waiting until after you've gone through the process, creating a Limited Company will mean you have to go through the admin work of creating your company alone, and getting started with an accountancy now gives you someone to call as soon as you have questions.
Select a Name and How to Incorporate
So you've done all the research and you are ready to become a Limited Company. What happens next?
With more companies than ever using online presence as a major driver of revenue, think carefully about how the name you've selected will perform online, and whether there is any benefit to a more straightforward name.
The ideal name will balance a clear value offer with a unique idea that stands out from other registered Limited Companies.
Once you've chosen the perfect name, work with your accounting organisation to supply all necessary details for starting a Limited Company. This process is fairly quick. You will need:
Memorandum of Association
Your Articles of Association
Your accounting representative will usually do the actual filing of this information. It is up to you to make sure you can access the information your accountant needs in order to move forward rapidly, so work on finding and organising that information, and your business growth accountant will do the rest. Pay special attention as the Articles of Association are formed; they will be the guidance you have for how to comport yourself as a Director of a company, and following the rules outlined in those documents is key to being a high-quality Director.
Preparing Tax Returns and Tracking Expenses
While some aspects of tax returns as a Limited Company may be simple, only requiring you to proof and approve what your accountant has prepared, other aspects, such as dealing with VAT, may be more complex. Learn from your trusted accountancy whether VAT is necessary and how to incorporate it into your invoicing structure, and they will help you ensure that this tax income makes it to the right place.
An important note to remember as you choose an accountant is that your taxes grow more complex when you aren't consolidating your information so that it is all easily accessible. Forma offers you the opportunity to turn to the same experts each time to get advice and to have all of the relevant information stored at your fingertips in our system.
As your Limited Company gets going, you will find that there are expenses you may have never had as a Sole Trader. Some of the early, or pre-trading, expenses you'll incur include:
Business cards as well as official letterhead.
Computers, software subscriptions, and software licenses
Rental, if your company requires physical office space
There are also a variety of ongoing expenses that will impact you as a business owner, but it is important to speak with your accountant about gray area expenses that may seem to benefit you personally and professionally, such as expenses incurred while working from your home residence.
Benefits of a Trusted Accountant and Burdens of Directorship
This may be the first time you've established a great relationship with an accountant, but the incorporation of your Limited Company is only the beginning of such a partnership. Here are some of the ways that the right business solution will help you, even in just the first years:
They can help you with establishing a business bank account through a reputable bank that offers the kinds of services you will need to succeed. Not all bank accounts are created equal, and just because you are experienced with choosing personal banking options doesn't mean you know all the needs you will have for a corporate account.
When you go to file your first corporate tax return, they will help you sort through your (now well-organised) documentation to ensure that you reduce your tax burden substantially. Ultimately, the right corporate accountant is the one who helps you take home more of your income while charging you a reasonable fee, not someone who cannot show the results of their assistance.
As mentioned briefly above, expert accountants will notice opportunities for incentives and will inform you if the laws surrounding Limited Company taxes change over time. Having a trustworthy accountant is like having someone keeping track of the business tax law news for you.
All of the above services are available through Forma, but we provide a more comprehensive solution: we work with companies from incorporation through their accounting needs and also handle items like virtual offices and business insurance, all from one central company.
Once you are officially a Limited Company director, you'll have a few responsibilities that Sole Traders do not have; getting to know them now, before you ever start the company, is the best way to feel ready to move forward.
You will interact with Companies House, first by registering your company and then yearly through annual accounts and confirmation statements.
You will file your corporate tax return and your personal tax return through Her Majesty's Revenue and Customs (HMRC).
As far as responsibilities to the company, you have to see the company as an entity of its own, and you as director want to work in its best interest. This means, if there are other stakeholders in your company, that you inform them if any conflicts-of-interest exist, such as personal benefit you might receive from a choice you are making on behalf of the company.
In incorporating the company, you've also taken on the responsibility of following the rules, keeping excellent records, and reporting out any major changes in the business.
These are strict guidelines, but they can be performed by many individuals if you know what you are getting into from the start. If you are in bankruptcy, under 16 years old, or are in other ways disqualified, you'll not be able to create a Limited Company and serve as Director yourself.
Even after your Limited Company is set up, new challenges always arise in the exciting world of small business. Bring Forma along to always have a knowledgeable financial organisation to turn to with your many questions.