Thinking of setting up a business? We sit down with Darren Stone at Leon & Company Chartered Accountants to talk us through the entity routes available.
Hi Darren! So, what’s the best way to set up a new business?
The most common way that a new business is set up is either by using a limited company or by registering as self-employed. But the choice of how you set it up depends on several factors, including business type, turnover, tax implication and limitation of liability.
How does becoming a limited company limits liability for an individual?
A self-employed trader has their business set up in their own name and all tax is paid via their self-assessment tax return. Whereas with the limited company route, the trader would become the owner and director of a limited company, which is a separate legal entity taking responsibility for the finances In effect, when you’re self-employed, you and the business are the same thing, with a limited company the two are quite separate in the eyes of the law.
Can our readers determine the right route for them?
Firstly, every situation is different, so always take advice from an accountant. In general, when a new business is started it will be easier to be self-employed to start with as the administration is a lot less onerous. Also, I’ve found that for certain new businesses that spend a lot of money on setting up and investing in equipment can end up with a tax advantage when they set up using the self-employed route.
However, some businesses might need a limited company due to commercial factors and trading requirements, and others may go down a different route, for example partnerships or LLPs (limited liability partnerships) which often suits legal practitioners where partners have invested.
Is it flexible as the business grows?
Definitely. When a sole trader grows beyond a certain size, I’d often recommend incorporating the business into a limited company, as it can be potentially very tax efficient.
Article first published in JLife magazine.
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