One of the most important decisions to make when going into business is whether to trade as a company or as a sole trader. The decision has consequences for tax, legal and financial responsibilities and the amount of administration you will need to complete. Whilst there is no straightforward answer, we have given a non-exhaustive explanation of both below.
In essence, a sole trader is a self-employed person who owns their business entirely on their own. This is the simplest and most popular business model and can be set up for tax purposes online via the GOV.UK website.
Many prefer this business structure as it is easy to set up and involves little administrative paperwork, other than an annual self-assessment tax return. Being a sole trader also provides a greater level of privacy than incorporated businesses as an incorporated business must provide details on Companies House online.
Sole traders do however have unlimited liability. This means that if the business gets into debt, the business owner is personally liable. As such, sole traders could stand to lose personal assets if things go wrong.
A limited company has its own legal identity, separate from its owners (shareholders) and its managers (directors). This remains the case even if it is run by just one person, acting as shareholder and director, meaning personal assets aren’t exposed if the company is to get into debt (unless personal guarantees are in place).
Broadly speaking, limited companies are more tax efficient than sole traders as rather than paying Income Tax, they pay Corporation Tax on their profits. At present, this offers a better tax rate. There is also a wider range of allowances and tax-deductible expenses that a limited company can claim against its profits.
Once you’ve registered a company name nobody else can use it, in contrast to sole traders who aren’t offered the same protection.
As a director of a limited company, you will have responsibilities which you must adhere to at all times. These can be found in section 171 – 177 of the Companies Act 2006. You will also need to file a yearly annual return and annual accounts for the company.
Information pertaining to your business can be found on Companies House i.e. directors’ details and your company’s earnings. This sort of transparency may not appeal to all.
It is vital to weigh up the difference between sole trader and limited company and discuss this with your accountant. Do not rush into any decision before you speak to your accountant as their expertise can be invaluable when it comes to the tax aspect.
A sole trader legal structure for your business is the easiest to set up, which is why it has been proven to be such a popular option. However, there are clear advantages to running your business through a limited company structure. Before making a decision, it’s important that all factors are considered. Ensure that you have weighed up the pros and cons of all legal structures to see what fits you and your business best.
If you would like to speak to one of our team, please get in touch with the Corporate Commercial department on 01256 320555.