Company Formation

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Sole Traders

Is your business going to be small?
Will you be working alone and not employing anybody?
Are you happy to trade in your own name, rather than the name of a company?
Are you not confident with paperwork?

If you answered yes to all or most of the above questions, then you may be best operating as a Sole Trader, which means you will be trading as yourself rather than as a separate legal entity in the form of a limited company.

Sole Traders are not restrained much by legal formalities when operating their business, such requirements will usually relate to just employment or to trade specific activities, for example, the requirement to have public liability insurance or to carry out detailed risk assessments if working outside with the public.

Sole Trader formats are common, but offer little protection to the individual operating the business as they will have unlimited liability meaning that any debts of the business will be recovered from the owner. If you borrow money for the business, and the business stops trading or goes bust before the loan is repaid, the loan provider will look to take assets of the owner, e.g. houses, cars and personal possessions.

If you plan on setting up as a Sole Trader, it is important that you inform HM Revenue & Customs ( of your intentions to be working as Self-Employed. You will only need to keep basic accounts which show your income and expenditure to support any self-assessment tax return; you will also need receipts and invoices as evidence.

If you operate your business alone you may find it difficult to take holidays as the business could suffer, a good example would be a window cleaner; if John, the local window cleaner in Southampton wanted to spend his hard earned money by jetting of to Greece for two weeks in May, his loyal customers in Southampton may not feel so loyal with two weeks worth of dirt on their double glazing, and may decide to take their custom elsewhere to a larger, more reliable operation.

If you require investment in your business, such as a bank loan, it is likely that you be required to construct and present a detailed business plan, regardless of which type of business you operate as. It is important to remember that any loans or credit will be given to the individual and will be secured on personal assets, if the finance is provided through long term investment; the investor may want to buy shares in your business. If somebody does want to buy a share, you should incorporate your business and create a limited company so that you can sell the shares to raise capital as you see fit.

Our Top THREE Benefits and Drawbacks

o Less legal formalities and filing to comply with
o No fee’s to set up
o More flexibility

o Unlimited Liability
o May limit sources of investment
o Holidays may be difficult or impossible to take

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