We are often asked by clients whether it is best to register as Self-employed or set up a Limited Liability Company. There are many variables that come into play when making this decision ranging from the business model, size, structure, the number of investors and more. Because of this, there is no right or wrong and this article should help you gain a better understanding of both structures and ultimately help you make that decision.

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Definitions

Self-employed – A self-employed person is one who carries out a trade or operates a business as an individual. As opposed to a person who is employed by an employer, a self-employed person does not receive a fixed salary and must generate income through their trade or business. Most appropriate for family businesses and small businesses where the owner is fully integrated into the operation.

Company – A limited company is an entity which exists in its own right, therefore having its own identity. It may have one or more owners being the shareholders of the company whose personal finances are separate from those of the company limiting liability to company level. Most appropriate for larger businesses where the owners are not necessarily involved in the operations.

Self-Employed (sole-trader)

Becoming self-employed is the easiest and quickest method of setting up your own business and you can be up and running almost immediately. First off you will need to register for a VAT number from the VAT department, then you will need to register yourself as a self-employed person with relative government departments. If you intend to employ people, you will also need to register yourself as an employer.

Advantages:

  • Quick to get started.
  • Lower administrative costs as Book-keeping is minimal and does not require an audit by law.
  • Financial statements are not published keeping your financials private.
  • Can easily be converted to a partnership or Limited company at a later stage.

Disadvantages:

  • The business structure doesn’t promote growth.
  • The business owner is liable at a personal level.
  • The transfer of the business may be more complex.

Limited Company

Since a company has its own identity, the setting up of one is a little more complex. As a first step, the Memorandum & Articles of Association (Bylaws) must be prepared and registered. The memorandum will include the company details such as shareholders’ details, directors’ details, company objectives, etc. while the Articles establish the internal regulations. A company must be registered with the registrar of companies and a VAT number, as well as an Income tax number, must be obtained. If the company intends to employ people, it will also need to register as an employer. The owners of the company may also be employed with the company.

Advantages:

  • Liability is limited to company level separating the shareholders from the company
  • The company Structure promotes growth
  • The separate identity generates credibility which assists in acquiring external funding
  • A limited company has a more professional image when it comes to business dealings
  • Transferring the business or part of the business is as simple as transferring shares

Disadvantages:

  • It may be costly to set-up and can take some time
  • Accounts must be more detailed and require an annual statutory audit, therefore, increasing administrative costs.
  • The tax rate has a flat rate of 35% on profits as opposed to the progressive tax rates of self-employment.
  • Financial statements are published exposing financial data to competitors

Self-Employed vs Limited Company
Both business models – self-employed vs limited company have their advantages and disadvantages. If you are still not sure about which way to go, at CORE we can guide you to ensure that all the necessary steps are taken to get your business moving in the right direction. For more information on how we can guide you, send us an email at hello@ces.com.mt

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