It can seem daunting to make key decisions about your e-commerce business right at the start. One of the choices that must be made is how you should register an e-commerce business, whether it is as a sole trader or a limited company. Both have pros and cons, so let’s look at these options so you will be making an informed decision.
Too often new business owners can associate sole trader as the default starting position, and limited company as the goal to grow to, but it’s just not that simple. You can register as a limited company from your e-commerce business’ inception or you may want to remain a sole trader regardless of your growth.
Registering as a Sole Trader
Sole Trader businesses make up a large majority of businesses in the UK and with good reason. They are easy (and free) to set up, there is less regulation on them, and start-up costs are likely to be minimised. You will also be required to register for self-assessment, and as such, will need to fulfill those obligations each tax year.
Additionally, you will be able to minimise your accounting costs as annual accounts will not be required. You will, of course, still need to maintain stringent records of your income and expenditure for tax purposes. As a sole trader, you will also retain 100% of the profit from your e-commerce business. If your e-commerce business is in its early days, profits may be small, so holding onto them in their entirety can be crucial to keeping your personal finances on track. Finally, you can make changes with minimal fuss. Whether you are looking to change your business name, accounting date or structure, all these choices are easier to adjust as a sole trader.
While all that sounds tempting, limited companies exist for a reason, and the main drawback of a sole trader business is also the main benefit of a limited company – liability. If you are registered as a sole trader, then all debts and liabilities of the business are yours. If the e-commerce business goes bust, you do too, and if a lawsuit occurs, your personal financial situation will pay the toll. Additionally, while sole trader start-up costs are smaller, you may find it harder to amass outside funding, even in the form of a bank loan, as would-be lenders will be wary of your ability to pay back your debts if your business goes through a rough time.
Registering as a Limited Company
If you register as a limited company, you will portray your e-commerce business as more professional and established. A similar logic can be applied to voluntarily registering for VAT. Because of this projected image, you are likely to find outside capital easier to obtain, and possibly even preferential treatment or prices with manufacturers and wholesalers. As mentioned above, one of the primary purposes of a limited company is to limit your liability; the company’s debts remain within the company and don’t affect your personal finances. Additional benefits, such as pensions, are allowable business expenses in a limited company, giving Directors a distinct tax advantage over sole traders.
There are downsides to a limited company too. They are more complex to set up and require fees to be paid. If you are happy to register your e-commerce business yourself, it can cost as little as £12 on the HMRC website, but you will most likely require an accountant to do a company formation as mistakes at this stage can be costly down the line. You will need to submit yearly accounts, which again will likely raise your accountancy budget, and limited companies have more regulation to adhere to across the board.
What are the other options for an e-commerce business?
While we may be examining the advantages and disadvantages of two particular entity structures, you can, of course, register as a Partnership or Limited Liability Partnership (LLP) if you share control of your e-commerce business. A partnership works in a similar way to a sole trader-ship and an LLP works similarly to a limited company.
Choosing how to register an e-commerce business
Now the advantages and disadvantages have been laid out, the decision of whether to register an e-commerce business as a sole trader or limited company should seem clearer, but it’s not a choice to be made lightly. Limiting your liability and the appearance of size are the major benefits of beginning as a limited company, but if funds are likely to be tight and your choices aren’t set in stone, then the flexibility of a sole tradership will work very well.
How to register
Once you have decided on your business’ initial path, you may register it via the HMRC website. If your e-commerce business is already up and running but you would like to change its entity structure you can also do this via the HMRC website. To make sure this is done correctly, you are best running it past your accountant. You can also request that a professional or accountant register on your behalf, making the process stress-free.
The next steps
Whichever way you decide to go, you can grow your e-commerce business swiftly and effectively. If you are looking for help in making the decision or have made it but need assistance scaling your business then get in touch with our team.
The best time to start is now.