News

Incorporation vs Sole Trader

Factsheet

Incorporating a company on the Isle of Man is relatively straightforward and can be done a few ways. There are two different “Companies Acts” in the Isle of Man: 2006 Act and 1931 Act, and an LLC Act under which companies can be incorporated.

2006 Act

The 2006 Act was introduced to give the Island an up to date and highly flexible framework for company registration. Most of the rules and requirements of the old 1931 Act have been swept away in favour of a more tailored approach which allows the shareholders of the company, the choice of tailoring the Articles to their own requirements. Setting up and operating a limited company carries many obligations and understanding the different types of companies which are available and the responsibilities which inevitably go hand in hand when forming and operating a company are important first steps towards company incorporation.

The types of companies that are incorporated or continued under this act are as follows:

  • A company limited by shares;
  • A company limited by guarantee;
  • A company limited by shares and by guarantee;
  • An unlimited company with shares; or
  • An unlimited company without shares.

1931 Act

All companies incorporated under the Companies Act 1931 are designated as either public companies or private companies. A public limited company (“PLC”) may offer its shares or debentures for sale to the general public and must, on an annual basis, deliver audited accounts to the Companies Registry. A private company may not offer shares or debentures to the public and, unless it is a subsidiary of a public company incorporated in the Isle of Man, it is not required to deliver audited accounts to the Companies Registry on an annual basis.

Benefits of setting up a company

  • Asset protection;
  • Easier to sell your business should you come to sell it in the future/perpetual succession;
  • Potential tax planning;
  • Easier to raise capital; and
  • Increases credibility.

Sole Trader

A sole trader describes any business that is owned and controlled by one person, although they may employ workers. They do not have a separate legal existence from their owner, so as a results, the owners are personally liable for the business’s debts, i.e. they have unlimited liability.

Benefits of being a sole trader

  • Businesses are usually small and relatively easy to set up;
  • Generally, only a small amount of capital needs to be invested which reduces the initial start up cost; and
  • It is easier to keep overall control because the owner has a hands-on approach to running the business and can make decisions without consulting anyone else.

Disadvantages of being a sole trader

  • The sole trader has no one to share the responsibility of running the business with;
  • Developing the business is also limited by the amount of capital personally available; and
  • There is also the risk of unlimited liability, where the sole trader can be forced to sell personal assets to cover any business debts.

Incorporation vs sole trader

Although the sole trader route, which is commonly referred to as being self employed, is the most popular way of running a business in the UK, there are significantly more advantages of operating as a limited company. Setting up as a sole trader is without doubt the simplest way to start a business, all you need to do is inform the Isle of Man tax office that you are working as “self employed”, and account for your business activities on your personal tax return each year.

Starting up in business as a limited company involves a more complex formation process, and the financial and administrative responsibilities of running a limited company are certainly greater than those of a sole trader.

Things to consider when setting up your business:

1.     Tax

Setting up your own company rather than trading as a sole trader will lead to tax planning opportunities.

2.     Distinct Entity

A limited company is a completely separate entity from its owners. Everything from the company bank account, to ownership of assets and involvement in tenders and contracts is purely company business and separate from the interests of the company’s shareholders. A sole trader and their business is treated as a single entity for tax purposes.

3.     Limited Liability

If you run your business as a limited company, you are afforded some protection from personal liability. Assuming no fraud has taken place, you will not be personally liable for any financial losses made by your limited company. Those running a business as a sole trader will be personally liable.

4.     Name of your company

Once you register your company with the Companies Registry, your company name is protected by law. As a sole trader, it’s possible someone else could trade under the same name as you, and you can’t do anything about it. Unless of course you register the business name with the Companies Registry following which you can operate as a sole proprietor.

5.     Shareholders

A limited company can issue various classes of shares. This means you can easily sell stakes in the company, or transfer ownership of shares.

Summary

If you are interested in meeting to discuss which vehicle would best suit your circumstances, please contact Browne Craine & Co on: +44 (0) 1624 629369 or email: office@burleigh.co.im

To download the Incorporation vs Sole Trader factsheet, please click here.

Peregrine Tiagnet ICAEW