Sole Trader v Limited Company?
19/02/10
Sole Trader v Limited Company?
Friday 19th February 2010
Many businesses whether they are just starting out or have been successful for years ask themselves the question should I operate my business as a sole trader or a limited company?
Peter Mardon, Managing Partner and head of AES Winterbothams Company/ Commercial team explains;
The main benefit of having a limited company is that you have limited liability. You and your company are separate legal entities. Providing you make it clear in all your dealings (be it letter heads, invoices, e-mails, business cards etc) that your business is a limited company the company will owe money and be owed money not you personally as its director/shareholder.
With that benefit, however, there comes responsibility. This is that every director in the country, whatever size their company is, has specific duties they have to comply with including filing annual returns and accounts at Companies House. Failure to comply can be costly and in certain limited circumstances the company, other shareholders, a liquidator or others could take action against you personally.
The duties directors owe to their companies were codified in the Companies Act 2006. They include a duty to act in accordance with the company’s constitution and to promote the success of the company for the benefit of its shareholders.
There are also duties to exercise independent judgment and reasonable care, skill and diligence. A director has to avoid conflicts of interest and declare to the company’s other directors any interest they may have in a proposed transaction or arrangement with the company. There is also a duty not to accept benefits from third parties. Directors also have many other duties imposed on them such as those under health and safety legislation.
Of course in some industries small businesses cannot open accounts with larger companies at all or unless the directors sign personal guarantees. This erodes the benefit of limited liability.
Also don’t forget to check with your accountant as tax treatment is very different depending on what trading style you have. The different in tax liabilities can be substantial and you need to know which suits you best.
It is all to easy to think that limited liability is the way forward – stop for a moment for advice on whether it is right for your business. And do not forget limited liability partnerships (LLPs) which are a relatively new business model but becoming very popular.
For specialist advice on what is the best trading style for your business please contact Peter Mardon on 01453 847210 or prm@aeswinterbothams.com. This article provides general advice and cannot be relied upon in any particular case.
In addition our Company/Commercial team can assist you with:
Buying and selling your business whatever its size or location;
Drafting and negotiating commercial contracts and advising upon commercial contract disputes including distribution and agency arrangements;
Forming companies, LLPs and other partnerships and joint ventures and advising upon partnership and shareholder agreements.