"Lieu, I'm planning to open a Ha Tinh eel soup restaurant. Should I operate as a Sole Trader or set up a Limited Company?" This is a question I receive frequently from individuals looking to start a business. So, let's break down these two structures!
1. Legal Liability: If the business encounters issues, lawsuits, or bankruptcy, who is responsible?
a. Sole Trader (Self-employed): In Vietnamese, this is often referred to as "self-do, self-eat" or "self-report tax."
- Legally, you and your business are one and the same. There's no distinction between your personal assets and business assets.
- If the business cannot pay its debts, your house, car, and other personal assets can be used to settle those debts. -> Simply put, you bear all the responsibility, all the way.
b. Limited Company:
- The company and you (the business owner) are two separate legal entities. The company has its own assets, incurs its own liabilities, and is legally responsible, entirely separate from you. "Limited" means your liability is limited to the amount of capital you've invested.
- However, there are exceptions to "limited liability" based on contract terms. For example, when a company borrows from a bank (Business Loan), the bank often requires the owner to personally guarantee the debt if the company cannot repay it. -> Basically, the company is responsible for its own debts. If it can't pay, it goes bankrupt and closes down. Your personal assets are generally protected, and you won't have to sell your house or car to pay business debts (unless you've provided a personal guarantee).
2. Registration Process and Information Security: How complex is the registration process, and is personal and business information kept private?
a. Sole Trader:
- You don't need to register your business with Companies House, so your personal and business information remains private.
- You only need to register for Self-Assessment with HMRC (Her Majesty's Revenue and Customs) and obtain a UTR (Unique Tax Reference) number to file your personal tax return.
b. Limited Company:
- You'll need to provide information about the company, its owners (Shareholders), and directors to register the company with Companies House. All this information is publicly available on the Companies House website for anyone to view.
- Because the company and you are separate entities, HMRC will require you to file two types of reports: one for the company (Annual Accounts) and one for yourself (Personal Tax Return) -> a more complex procedure than for a Sole Trader.
3. Company Name: If I choose a business name, will it be legally protected?
a. Sole Trader:
- Your business name isn't registered with Companies House, so other businesses can use the same name. This can reduce credibility and recognition with partners and customers, who might confuse your business with another.
b. Limited Company:
- The registered name of your company is protected by Companies House, and another company cannot register the same name.
- However, there's a difference between a registered name and a trading name. For example, a company might be registered as ABC Limited but trade as Ha Tinh Eel Soup. Only the registered name (ABC Limited) is automatically protected, not the trading name (Ha Tinh Eel Soup).
- Both Sole Traders and Limited Companies can register a Trademark to protect their trading name.
4. Costs: Which business structure is more time-consuming and expensive?
a. Sole Trader: The simplest structure with the lowest setup and operating costs (lower accounting fees).
b. Limited Company: A more complex structure involving more administrative procedures for setup and maintenance -> requiring more time and higher costs (significantly higher accounting fees compared to a Sole Trader).
5. Taxes: What types of taxes will I have to pay?
a. Sole Trader: You'll pay Income Tax (20%, 40%, or 45% depending on your profit level) and National Insurance contributions (Class 2 NIC and Class 4 NIC).
b. Limited Company:
- The company will pay Corporation Tax (currently 19%-25% depending on the profit level).
- As the owner, you can:
- Draw a salary from the company -> pay Income Tax (20%, 40%, 45%) and Class 1 National Insurance contributions.
- Receive dividends -> pay Dividend Tax (8.75%, 33.75%, 39.35%).
- Retain profits within the company for reinvestment.
If your business has low income, the total tax paid might not differ significantly between the two structures. However, if your business profits exceed £50,270, as a Sole Trader, you'll enter the 40% Income Tax bracket, and 45% if it exceeds £125,140. With a Limited Company, you can potentially draw a reasonable amount as salary or dividends, paying a moderate level of tax, and retain the remaining profits within the company for investment and growth.
I'll share more details on tax calculations in future articles!
6. Hiring Employees: Can I hire and pay employees?
Both Sole Traders and Limited Companies can hire employees. However:
a. Sole Trader: The business owner won't be on the payroll. Simply put, the business's money and your personal money are the same, so you don't "pay yourself" a salary.
b. Limited Company: The company's money is separate from your personal money. The owner can choose to be paid a salary by the company or not (as mentioned in point 5).
7. VAT: Do I need to register for VAT?
Both Sole Traders and Limited Companies are subject to the same VAT rules. You'll need to register for VAT if your turnover in a 12-month period exceeds £90,000.
So, should you operate as a Sole Trader or register a Limited Company? It depends on individual priorities, but here's my general overview (for reference):
In the early years of business, saving costs might be a top priority for many. Coupled with uncertain income, starting as a Sole Trader (Self-employed) is a good option: simple process, business information is private, and accounting fees are lower.
If you anticipate significant profits from the outset or within a few years of trading, you might consider registering a Limited Company: personal assets are protected, tax efficiency can be optimized, the registered company name is unique, and it offers greater credibility and recognition with partners and customers.
[This article is the author's intellectual property. Please cite the source if you reproduce it.]