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The decision has implications for tax, legal and financial responsibilities, the amount of paperwork you will need to complete and how your peers view you. There is no straightforward answer, because different legal structures suit different situations. Many start out as a sole trader or partnership and then progress to a Limited Company when their business model has gathered momentum. Sometimes it is appropriate to incorporate as a Limited Company from the beginning. For example if you are a tradesman and take on a job with a large contractor or the States of Guernsey often they will require you to be a limited company before awarding you the contract.
Often the main advantage of incorporating your business is limited liability which means that your personal assets can be protected from those of your business. The directors are only liable for the debts of a company if they continue to trade and incur liabilities after it becomes apparent the limited company is insolvent.
If you run a business with ‘Limited’ after your name, it can make you look more credible than when you act as a sole trader, which can be important if you want to get those all important contracts. It is also true to say that larger companies will often prefer to deal with limited companies.
Forming a private limited company is an indication that a business is both serious, has a long term objective and is correctly managed. This psychological perception can increase the good standing of a business. In addition funding requirements are more likely to be met as the lender to a sole trader has to consider the absence of a balance sheet statement in the basic accounts and the financial influences personally affecting the sole trader. A private limited company’s advantages concern the financial statements, protection of the financial position from personal influences and the option of increasing security by virtue of asking directors to provide additional personal guarantees.
A private limited company’s advantages over self employment also extends to long term finance. Companies tend to retain more funds within the business to meet future financial commitments which aids year on year growth, a more sustainable business and medium term profits growth over a sole trader.
A company continues to exist until it is struck off the Company Register. It means a business can continue even when ownership transfers or the owner dies.
Once you register a name with the Guernsey Registry, no one else can register the same name.
As a sole trader, your business profits will be assessed through your personal tax returns, and you will be charged 20% on all income. As a limited company your business earnings will be assessed at the business level (not on the individual). The current corporation tax rate in Guernsey is 0% for most companies (subject to a few exemptions which mainly affects regulated companies and property rental and development companies). Therefore tax will only be payable on drawings by the directors/shareholders of the Company. Retained earnings will be subject to 0% corporation tax allowing these funds to be reinvested into business growth.
Sole trader basic accounts are relatively simple so accountancy costs are low. Company accounts have to use double entry bookkeeping to produce the year end accounts including a balance sheet, profit and loss account, directors report and accountants report with statutory notes and statements. Accounting knowledge is required and an accountant’s fee will be higher than for sole trader accounts. Keeping accounting records for a limited company is governed by the Companies (Guernsey) Law, 2008.
A sole trader pleases themselves with regard to the administration and management of the business. A company director is responsible for performing company administration according to statutory regulations in regard to the limited company accounts, statutory books and management as stated in the articles of association of the Company. The duties of a director are more formal than a sole trader.
A company has to be incorporated by a corporate services provider and is also required to file an Annual Validation in January each year with the Guernsey Registry. It is common for directors of trading businesses who feel they may need some help in keeping the company’s statutory books in order and compliant with the Companies Guernsey Law (2008) as amended, to outsource the company’s secretarial and administration work.
Perhaps you are a sole trader and have been thinking about incorporating as a limited company?
For more information on companies in Guernsey that offer company formation services, take a look at our Business Directory.