Sole Trader vs Limited Company

The choice between Sole Trader vs Limited Company can be a tough one, It’s important to consider the issues and make the right decision to suit your needs.

Some of the items to consider when deciding on the best option are:

  • Limited Liability
  • Taxation
  • Reporting Requirements
  • Recognition

Limited Liability

One of the main advantages of having a limited company is limited liability. This means that your personal assets are protected if the business fails and you cannot be personally sued. The debts belong to the company and not to individual shareholders. However, sometimes banks may insist on personal guarantees. As a sole trader if your business falls into debt and goes bust your personal assets are not protected.

Taxation

All limited companies pay Corporation Tax on their taxable profits every financial year. The Corporation Tax liability is paid to HMRC by small limited companies within 9 months and 1 day of the limited company’s accounting year-end. The Corporation Tax rate for financial years 2018/19 and 2019/20 is 19%.  This is due to fall to 17% from 2020/21.

A limited company can pay out dividends to shareholders from its distributive profits. Tax is due and collected on the individual on their Self-Assessment Tax Return depending on the level of dividends paid. The dividends tax thresholds and rates are found here.

Sole traders pay tax on all income above the personal tax allowance. The current tax-free allowance for 2018/19 is £11,850 and for 2019/20 £12,500. Your Self-Assessment Tax Return is due with HMRC by 31st January following the tax year, along with the tax owed.  Self-employed individuals generally receive their income without any taxation being deducted. You will likely also have to make payments on account for the following tax year. You are also required to pay Class 4 National Insurance on profits and Class 2 National Insurance.

This section only covers the very basics with regards to taxation, as there is a lot more to consider. Generally it is still more tax efficient to be a limited company, however, accountancy costs are generally higher, as there is more involved.

Another thing to consider with both types of business is whether to VAT register.  VAT registration can make you appear a larger business and enable reclaiming VAT you suffer.  However, depending on your end customers you may become more expensive than your competitors.

Reporting Requirements

The main disadvantage for a limited company is the legal requirement to prepare annual accounts. These have to comply with current legislation and must be with Companies House within 9 months (small and medium companies) after the accounting year-end date. The register of companies public records can be found at Companies House. Certain details regarding the company need to be displayed on all company stationery and there are other statutory requirements (e.g. Confirmation Statements).

Annual accounts for filing do not have to be prepared by sole traders. However, you would still need to maintain a record of your business income and expenses. This will assist you in preparing your self-assessment tax return.

Recognition

A limited company structure may give the perception of a being more successful business than a sole trader. Suppliers, banks and clients may be more inclined to work with a limited company due to the limited liability nature of the business.

However, a sole trader business is much easier to set up and operate.

Conclusion: Sole Trader vs Limited Company

This article has only scratched the surface regarding the differences between a sole trader vs limited company.

We can help assist you with making a decision on which business structure that suits your needs. It is always important to get advice before making a decision.

There are many other types of business structures, with them listed here. This article contains a lot of links to government websites as reference limited company, running a limited company and setting up a business.

If you wish to speak to a member of our team, please contact us.

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