Starting your own small business is incredibly exciting, but it can also be a very daunting prospect. It’s often very difficult to know where to start.
Once you have a great idea in your head and have researched the viability of your venture, it’s time to make it official by registering a name and suitable structure for your new business.
A private limited company is one of the best legal structures because it provides a great deal of flexibility in terms of ownership and management. Unlike the sole trader structure, you can set up a limited company with other people or you can own and manage it on your own by registering yourself as the only director and shareholder.
Being a sole director of a limited company has a lot of benefits, but it’s also important to understand what the role involves to ensure you’re prepared and equipped to single-handedly manage a new business and make it a success.
Advantages of being a solo director
As long as you’re aware of your duties and responsibilities as a limited company director, which includes complying with all filing and reporting requirements for Companies House and HMRC, it can be an incredibly rewarding experience running a business by yourself.
The most obvious and significant benefit of being a sole director and shareholder of a limited company is that you alone will make all decisions. You don’t need to consult other people, seek approval from other directors, or compromise the way you want to run your business. You have complete autonomy.
Placing your trust in another person, especially when it comes to running your business, can be an unappealing prospect. Will they make the right decisions for the benefit of you and your company alone? Are they competent enough to handle the huge responsibility? Are they honest and reliable? By retaining control, you can rest assured that you will always do your very best for the business. And if any mistakes are made or any problems arise, it will be easier to determine what went wrong, when and how the issue occurred, and how best to rectify the situation.
Naturally, communication in a one-person company is a lot simpler than in a firm with two or more directors and shareholders. There’s no need to contact and communicate with multiple people before decisions can be made, or to determine if certain tasks have or have not been carried out. You only need to speak to yourself. You will, however, still have to keep a record of all important decisions by passing resolutions at board meetings or general meetings… even though you will be the only person in attendance at these ‘meetings’!
As a solo director and shareholder, you will own all company shares and be entitled to retain 100% of all profits generated by the business. There’s no need to share any surplus income with other investors or pay someone else to run your business. It’s far more cost-effective to manage your company on your own.
By setting up a company rather than running a business as a sole trader, you have the option to pay yourself in a tax-efficient manner. You can take a percentage of your income as a salary, which you will receive from the company through PAYE. Your salary will be paid from company profits before Corporation Tax is deducted – it is a tax deductible expense for the business.
The remainder of available profits can be issued to you as dividends, which are paid from company profits after the deduction of 20% Corporation Tax. The first £5000 of dividend income per year is tax-free. Above that amount, you will pay dividend tax through Self-Assessment. Dividend tax rates are always lower than Income Tax rates.
By taking a combination of a small salary and higher dividend payments, you could pay the significantly less personal tax than you would as a sole trader.
As you will own all of the company shares, you will have the power to sell shares to investors without giving up majority control. For example, if you create 100 shares and keep 75 for yourself, you could sell 25 individual shares in return for the capital investment. What’s more, by retaining 75% shareholdings, you will still be able to make all decisions regarding the way in which the business is run. This is because most company decisions require a majority vote of above 50% or 75% of shareholdings.
Disadvantages of being a solo director
Like all good things in life, there’s always a downside to consider. More often than not, however, the disadvantages of being a sole director of a limited company are outweighed by the numerous potential benefits. Nevertheless, here are some of the small downsides you may encounter:
Unless you appoint a company secretary to help with certain administrative functions, you alone will be responsible for carrying out all filing, reporting and record-keeping requirements. These include:
- Preparing annual financial accounts for both HMRC and Companies House.
- Completing a confirmation statement for Companies House at least once every 12 months
- Keeping accurate accounting records of all income and expenditure (receipts, invoices, purchase orders, delivery notes, loan agreements, credit arrangements, bank account and credit card statements, till rolls, petty cash books, etc).
- Notifying Companies House about any changes to the company’s registered details
- Registering for Corporation Tax and VAT
- Filing Company Tax returns and VAT returns
- Paying Corporation Tax and VAT
- Operating payroll
- Filing PAYE reports
These tasks are pretty straightforward once you get your head around them, Most of these administrative obligations occur just once a year, and your accounting and record-keeping responsibilities can be eased by appointing an accountant or bookkeeper.
The tedious day-to-day administrative tasks associated with a limited company can be time-consuming and could get in the way of actually running the business – dealing with clients, making and selling your products, growing the company, etc. However, this is when it can be beneficial to appoint a company secretary. And you can always hire employees or temporary workers to help you run the business if you find yourself struggling to manage everything alone.
Lack of support
Whilst full autonomy is a huge benefit, it can also be a disadvantage in some cases. There are no other directors to support you, to help you make difficult decisions, or to throw ideas about with. It all rests with you. This pressure can be too much for some people, so it would be wise to think carefully about whether or not you can cope with having to make all of the decisions on your own. That being said, you will be in the same position as a sole trader. Do remember, however, that you can get great help and advice from an accountant and Government-backed business support organisations.
Adding additional directors and shareholders
If you choose to register a company on your own, you can always bring in business partners and investors at any point in the future by appointing new directors and selling some of your company shares to other people. This is one of the many great things about choosing to run a business as a limited company rather than as a sole trader. You have many more choices and you can make necessary changes, on your own terms, to suit the needs of the business as it grows and develops.
About Rachel Craig
Rachel Craig writes for Quality Formations Limited, the online company formation agency. An expert in her field, Rachel provides in-depth guidance and advice on corporate compliance, workplace productivity and customer service.