Should You Incorporate Your Business Or Start as a Sole Trader?

In this article we are going to look at company registration and why you should consider incorporating your business.

In the UK you can set up a Limited Company (Ltd) and in the USA a LLC or C-Corp. Either way, we give you the rundown on why entrepreneurs should consider setting up a corporate body for their start-ups.

Company incorporation is a legal method of registering your business. Essentially, you are creating a separate legal entity from yourself. What this means is your new company will be treated as though it’s an ‘individual’ in its own right. Setting up a separate legal entity may be advantageous for a number of reasons, we highlight some of them here.

Legal Action

Setting up a a sole trader can leave you legally exposed

An incorporated business can be sued in its own right. What this means for you as an entrepreneur is it offers some level of protection should someone decide to take action against your business. As a sole trader if someone were to sue they could lay claim to your personal assets. Your house, your car and other personal assets could be at risk if the other party were to win. As a sole trader, you are personally liable should things go wrong. As a company, only the assets of the company are at risk.

The only exception to this is fraud, if you are found to be a fraudulent entrepreneur you will not be able to hide behind a corporate body and you may be found personally liable in such cases.


Sole traders are personally liable for business debt

An incorporated company can take out debt or loans in its own right. This means that any loans will be recorded on the company’s credit file and not your own. As a sole trader, all company debt will be recorded on your individual credit file and may hamper other applications for credit. If things were to go wrong a sole trader would be fully liable for the debt. In contrast, the company itself would be liable and not necessarily the owners unless they signed a personal guarantee.

Investors and Shareholders

As an incorporated entity it’s relatively easy to allocate shares in your new company since the legal structure is created for that purpose. This means investors can easily take a share in your business and their allocation can be easily recorded in the company register. As a sole trader, there is no easy vehicle for an investor to take shares in your business although a partnership may be set up it could mean both you and the investor could be liable for any future obligations unless a detailed agreement is set up laying down exactly what the obligations are for each partner.


Company incorporation – There may be tax advantages

An incorporated body will pay tax on its profits income, minus operating (Corporation Tax). Corporation tax may be considerably less than personal tax in many jurisdictions. A sole trader may pay personal income tax on their entire earnings. Many of the tax rules are less advantageous for sole traders than they are for companies. In the UK, for example, Corporation tax is currently 19%, and the personal income tax rate is currently 20% for basic rate earners and 40% for higher earners.

Record keeping

Having separate bank accounts and records for your business adds a degree of protection should there be any queries further down the line regarding your income. Since a corporation is a separate entity it cannot easily be argued that the income of your company is the entrepreneur’s personal income, a distinct line is drawn between company and personal. A sole trader’s income is usually viewed as the income of the individual after allowable expenses, no convenient distinction is drawn.

A company will usually have to file accounts and other statutory forms including company tax returns. The directors of the company will have to perform statutory meetings such as board meetings. There may be no such obligations on sole traders apart from filing relevant tax returns. Although at first glance the increased burden of paperwork may seem a disadvantage for companies, this may be offset by the ease with which loans and funding can be accessed for companies with filed accounts. Sole traders would have a harder time securing loans and investments, even grants since they are often perceived as higher risk.


Incorporation may help present a professional image

Put simply an incorporated business just looks more professional. In a competitive market image is everything. If all your competitors are incorporated you have to seriously ask yourself why you would want to set up as a sole trader.

Name Protection

Registering your company gives some protection to your company name but note it does not give total protection. When you incorporate your company, the name is required to be unique on the company register but remember it does not prevent someone from setting up shop with that company name as a sole trader! To protect your company name fully you should also trade mark your brand. As trade mark owner you can legally sue anyone who tries to use a name that is the same or similar to your own. A sole trader has no level of protection for their company name.

Final Thoughts

Of course, the final decision is yours, but hopefully, this article gives some food for thought. Although, a sole trader business is less burdensome paperwork wise. As a fledgling entrepreneur, it may be too risky to enter the dog eat dog world of business, fully exposed to all potential risks and liabilities.

To incorporate your company click here:

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