It can seem daunting to make key decisions about your e-commerce business right at the start. One of the early choices that you must make is whether you should register as a sole trader or limited company. Both options have pros and cons, so we’re here to help you make 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 not that simple. You can register as a limited company from your e-commerce business’s inception, or you may prefer to remain a sole trader regardless of your store’s size. Both approaches have advantages and disadvantages; much of it comes down to your tax status and preference.
Register as a Sole Trader
Sole Trader advantages
Sole Trader businesses make up the 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. 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.
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Sole Trader disadvantages
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 capital from external sources. Even bank loans can be tricky to navigate, as would-be lenders will be wary of your ability to pay back your debts if your business goes through a rough time.
Many business owners believe that as a sole trader you will not have to register for VAT. The thresholds and registration requirements are the same regardless of entity choice.
Register as a Limited Company
Limited Company advantages
If you register as a limited company, you may be portraying your e-commerce business as more professional and established than it is. 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.
Limited Company disadvantages
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.
As a limited company, you will need to submit yearly accounts, which again will likely raise your accountancy budget, and limited companies have more regulations to adhere to across the board.
Related content: How do I become a limited company?
Tax advantages
Limited companies often have tax advantages if you have other income. A combination of dividends up to the threshold, followed by a small salary is the usual course for maximum tax efficiency. We have covered the most efficient way to pay yourself as a director of an e-commerce store here.
Other Options
While we may be examining the pros and cons 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 similarly to a sole tradership, while an LLP is more akin to a limited company.
Sole Trader or Limited Company
Now the advantages and disadvantages have been laid out, the decision of whether to register 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. However, 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 your e-commerce business
Once you have decided on your business’ initial path, you will need to register it via the HMRC website. If your e-commerce business is already up and running and 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.
Related content: How to get a Government Gateway ID
When do I need to register my e-commerce business?
We’ve talked about how you should register your e-commerce business; now, let’s talk about when.
If you are registering as a sole trader, you will need to register with HMRC if any of the following apply:
- you earned more than £1,000 from self-employment between 6 April 2020 and 5 April 2021
- you need to prove you’re self-employed, for example, to claim Tax-Free Childcare
- you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits and a future pension
If you are registering as a limited company, you will need to register with Companies House to legally create your company. Companies House will inform HMRC once you’ve registered and, shortly after, you should receive a UTR number and details of Corporation Tax requirements. You must register within three months of starting your business in order to trade legally.
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, get in touch with our team.
The best time to act is now.
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