If you are considering starting a new business on your own, consider whether or not you should begin the business. Or you’ve successfully run your business as a sole trader, and now you think it’s time to make it more formal by registering it as a business.
Factors to consider
There are some factors to consider when starting a business. In most jurisdictions, registered companies are required by law to file accounts every year. It is often unacceptable to submit your business accounts. Many jurisdictions will only accept accounts audited by an independent certified auditor. If this is the case in your jurisdiction, you will have to pay an annual auditor’s fee, which will likely be a new and sometimes significant expense for your business.
There will also be costs associated with the legal establishment of the business. Depending on your business area, you may be required to complete several registrations. You will also need to draw up formal documentation detailing the nature of the business, its corporate rules, and structure and provide a list of directors. You may also be required to invest in the business in an initial lump sum, which may or may not be available after the investment.
Benefits of starting a company
Starting a business has many benefits, the most important of which is that a legal business is a separate legal entity from the business owners. It means that any legal action taken against the business does not affect the owners of the business as individuals.
To demonstrate the importance of this, let’s use an example. A self-employed entrepreneur specializing in manufacturing and selling custom cars was sued because one of the cars he sold crashed. Investigators determined that a design defect was the cause of the accident. If the lawsuit is successful, the self-employed person may be required to pay compensation, and all of their property, including personal property, may be confiscated to fund compensation.
The same person could set up a company and run the same business. In this scenario, the company is considered both the manufacturer and seller of the car. After the accident, a lawsuit will be filed against the company. Only assets owned by the business can be confiscated, and the owner’s assets will remain intact.
Operating as a registered business also brings an additional level of prestige. Potential customers looking for a particular product or service tend to believe that a registered company is more credible than a sole trader. It can be a key factor in making or losing a sale.
Tax
Working through a registered company can also result in significant tax benefits. Corporate tax is usually lower than income tax. Businesses can usually claim expenses that are not available to sole proprietors. For example, all running costs, such as purchasing, maintaining, fueling, etc., a company car can be deducted from profits.
