Before you even begin operating one of the most important questions you need to ask yourself is the setup of your new beauty business. The options are:
1. Sole trader.
3. Limited company.
What is a sole trader?
The simplest way of setting up your new beauty and aesthetics business! The best way to describe it would be self-employed, you and the business are one. So any liabilities the business has are also yours personally. All you need to get going is to tell the government, well HMRC specifically!
What is a Partnership?
A partnership is only relevant if there are going to be more than 1 owner ie 2 or more of you? It shares a combination of the structures of a sole trader and a limited company. For this I will assume this is a sole venture.
What is a limited company?
A limited company is one that has its own legal identity, separate from its owners ie you who are both a director and shareholder for smaller companies. For larger limited companies it may have separate directors/those running the business, to the actual owners ie shareholder.
Each have their benefits are downsides of which I outline below for you:
Sole Trader Advantages
• Very easy to set up and relatively little administration just your annual self-assessment tax return.
• Greater privacy than a limited company as your details are not held on a public and very searchable database at company’s house.
Sole Trader Disadvantages
• You will have unlimited liability, as they’re not viewed as your business and you personally are not a separate entity by UK law. This means that if the business gets into debt, the business owner is personally liable. As such, sole traders could lose personal assets if things go wrong.
• Future expansion becomes more onerous and ability to raise funds decreased, in fact once a business gets to a certain size they nearly always convert to becoming limited anyway, so an argument that you may as well do it from the start.
• Tax rates on sole traders aren’t as generous as for a limited company. Certainly, when you reach a certain level of sales, it’s not as lucrative to remain a sole trader.
Limited Company Advantages
• Unlike a sole trader a limited company has the benefit of limited liability, as incorporation forms a legal distinction between the business owner and their business. This means that personal assets aren’t exposed – you only stand to lose what you put into the company.
• Limited companies are more tax efficient than sole traders, as rather than paying personal income tax on earnings, they pay Corporation Tax on their profits. Effectively resulting in a limited company being more profitable due to the net resultant amount of surplus money/profits.
• A wider range of allowances are classed as tax-deductible costs for a limited company than that of a sole trader and in turn can be claimed against its profits further reducing your tax liabilities.
• Once you’ve registered your company name nobody else can use your name, in contrast to sole traders who aren’t offered the same protection unless they apply for a trade mark.
Limited Company Disadvantages
• A limited company brings a lot more added responsibility. These come in the form of Director’s Fiduciary Responsibilities, which dictate what a limited company director must do legally. This includes annually filing a company as well as annual accounts.
• This extra responsibility increases your costs whole also being time-consuming and complex. Realistically you will need to get an accountant to do this for you due to the specialist nature at a cost of around £1,000 per annum.
• What may not appeal to a lot of people is the fact that your details are available for inspection at companies House, which lists tings such as details on directors and companies financial figures.
Your Next Steps
Due to the nature of beauty and easthetic businesses dealing with the general public and the litigatious world the Americans have brought over to the UK, I would always recommend going limited as it keeps your previously earned assets safe from the new venture.
The tax advantages will often far out way the extra costs involved but if doing things properly you would still be paying an accountant £300 to £500 a year to file your tax return so actually its only a few hundred pounds more per annum.
Finally, I believe it gives you a much more professional feel and in your mind makes it a real business for you.
All being said however, it really is only a decision you alone can make based on your own personal circumstances.