Setting up your own business is a fantastic achievement and definitely something to be proud of, but there can be some difficult decisions to make and setting up as a sole trader or a limited company is just one of them. Unfortunately friends, family members and maybe even previous colleagues will all give you advice on the best business structure to use but it all comes to the level of personal responsibility that you are willing to accept.

Setting up

Setting up as a sole trader is perhaps the simplest option. All that is required from you is to inform HMRC that you are now self-employed and to take out any relevant business insurance and that’s it, you can begin to advertise, network and build up a client base. Be aware,, when acting as a sole trader, your company name is not protected. Setting up as a limited company is a little more difficult. You need to choose a company name, which you then need to register with Companies House along with all associated incorporation paperwork. This means that your business name is protected from use by other companies and your brand is unlikely to be damaged.

Income potential

As a sole trader you take “drawings” from your business which is taxed as income, comparatively as a company director you are still regarded as an employee so are entitled to a salary via the PAYE system. As a sole trader the level of income you receive is unlikely to be as high as that of a company director. On top of a monthly salary, a company director can take a proportion of income as dividends which do not attract as much tax.

Business administration

As a company director there is a considerable amount of administration to be completed. You are required to submit an annual corporation tax return, company accounts, VAT returns (if applicable) and an annual confirmation statement which as a public record providing details about the company and its directors. A sole trader has significantly less responsibilities. An annual self assessment tax return is required and once the VAT threshold is reached you will need to become VAT registered.

Tax responsibilities

Limited companies pay tax on profits over a certain level and have a range of reliefs, allowances and deductible expenses available to them. Whilst this is beneficial, it opens up a whole lot of complexities and so many company directors choose to hire an accountant to make sure that all HMRC requirements are submitted. Sole traders do not qualify for the same benefits as limited companies. Income tax is paid on taxable profits via the self assessment tax system along with National Insurance contributions.

Personal accountability

As a sole trader both you and your personal assets are at risk. You are personally liable for all the debts of your business. It is important to take out personal indemnity insurance and employers liability insurance where necessary whereas, as a company director your company is viewed as separate to the individual so personal liability is limited to the amount you have invested in the company.

Both business structures have their benefits and disadvantages, and this is by no means an exhaustive list, ensure that you do your research and are certain you have made the right choice for your business. One thing that is for certain, no matter which structure you choose you will encounter non-paying customers and they can damage you financially. At Commercial Domestic Investigations, we take the time to get to know you and understand your business. We can assist you with your credit control from a sole trader to a multi-national corporation our services can be tailor made to suit you. If you want to discuss your credit control requirements contact our team on 08444 159200 or email