Is it Best to Set up as a Sole Trader or a Limited Company?

by akesha / last updated October 16, 2018

Sole Trader or a Limited Company

Some like the comfort of being an employee, others want to control their own destiny. Either are good, and it’s possible to do both at the same time. But there are hoops to jump through for those that want to work for themselves, either full or part time.

Sole trader or limited company?
The first step is to decide whether to work through your own limited company or become self-employed (which could be on your own or in partnership with another). The decision requires thought because it can affect your liabilities and tax.

If you’re self-employed your income and profits are taxed via Income Tax and self-assessment at different rates depending on your profit. On top of that you will also have to pay National Insurance. Profit cannot be deferred to another year. To see what you might have to pay, look at the calculator here.

In contrast, companies pay Corporation Tax on their profits. They can also move profits into a different tax year and declare dividends (payment per share in the company) if the tax bill is more advantageous. Various calculators to help work this out are available here. 

In terms of tax, company directors may be able to (legally) arrange their affairs so that they pay less tax. Sole traders pay tax and National Insurance on all income – personal and business. However, company directors can pay themselves small salaries and take the rest out as dividends which have no National Insurance charges. However, the government has moved the goal posts with a new dividend tax so do take advice first.

But there’s more to the sole trader or limited company decision.

First of all, a company is a separate business entity to a sole trader. This means that if the company finds itself in hot water, your personal money and assets are generally separate and safe. You’ll only be personally liable if you’ve acted illegally or wrongfully.

If you’re a sole trader, everything you and the business have are treated as one and so all can be included in any settlement.

The administration required for running a company is far more complex and costly. Company directors have legal duties placed upon them and have register at, and are regulated by, Companies House. Accounts and returns have to be made annually and on time. As a director, even if an accountant is used, you are responsible for these documents.

It’s worth pointing out that if the company takes on borrowing, you as a director, could be asked to personally guarantee it.

But you can have your cake and eat it. You can start as a sole trader to test the water and then, if you want to, move your business into a limited company.

This article was written by business and legal expert Adam Bernstein, for more information on Adam’s work click here

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