I often get asked by business owners whether they should trade as a sole trader or under a limited company. It’s a decision that’s sometimes simple to make, but there are pros and cons to be considered and you may find that after some thought one style suits your business better. I will explain more on the key differences below and offer some food for thought…

 

 

If you are a sole trader or in a partnership, you have the option to choose your own annual accounting date for preparing your annual accounts although many decide to stick with the tax year ending on 5th April for ease. Final payment of income tax as a sole trader or partnership is due by the 31st January of the following year under the self-assessment regime. There may be the need to make advance tax payments, called “payments on account”, if your last tax bill was more than £1000 although you should have been informed by HMRC if interim payments in this way were due (on the prior 31st July).

If you are a limited company, your company’s year end can vary and will often be the anniversary of when your company was incorporated, unless you have chosen to change this (via Companies House). Any corporation tax on the company’s profits will be due 9 months and 1 day from the end of the tax year, but any salary you pay yourself through a payroll will be taxed as you go (under PAYE) and any dividends will be taxed under the self-assessment regime and due on 31st January of the following year.

 

 

One of the things that prompts incorporation of a business is the limited liability you achieve. Limited companies are their own legal entity which means that any contracts, liabilities etc. belong to the company and not the individuals running it. This idea is attractive as it offers the owners (shareholders and/or directors) a limited liability should the company get into legal or financial difficulties. As a sole trader you are the business and so any liability lies with you.

 

 

There are also tax savings to be had by incorporating due to differing rates of tax for different types of income. As a sole trader you will be taxed on Self Employed income (plus any other categories of income you may have from other activities such as property, savings and pensions) but as the director of a limited company you would be taxed on Employment income (if you set up a PAYE scheme and pay yourself as an employee) and also Dividend income for any additional sums extracted from the business. There are often different tax rates and Personal Allowances for each type of income. The National Insurance Contributions also differ for the self-employed (Class 2 and Class 4 NIC) and employed (Class 1 NIC). 

 

If your business has low profits then it may be more costly for you to incorporate as there will be additional accounting charges for preparing and submitting statutory accounts and a corporation tax return and Confirmation Statement fee for the limited company as well as a director personal tax return. As the profits increase, the tax savings can outweigh these extra costs so get advice from your accountant with regards to the best options. Of course, this is something I am happy to assist with.

 

 

In some industries, having a company registered with Companies House can look more professional to potential suppliers and customers. This registration can make a business more appealing to some as there will be one or more directors running the company – which can sound incredibly important in the right situations! Customers and suppliers may take the company more seriously if they know that time has been put into incorporating a business.

 

There are also financing benefits of being a limited company as it can be easier to get credit and business loans than if it was based on the application from a sole trader. This isn’t always the case of course, however the options for sourcing funds for a limited company aren’t as limited as finance can be raised through the issuance of shares.

 

 

If you are looking to preserve your business name so that no other company can use it then the easiest way to do this is with incorporation. There can only be one “Joe Bloggs Ltd/Limited” whereas there can be many “Joe Bloggs Widgets” sole trader businesses as there is no legal right to be unique in this way.

 

 

When a limited company business owner dies or no longer wants to be involved in the business, there is the option to transfer their shares in their will or they can be sold to another individual/company who will take on the business. If you wanted to share the business with someone else then you can have more than one shareholder on a limited company as well, with the company being set up to the requirements of those concerned. 

 

 

If you have any other questions or would like assistance with setting up your business, then please do get in touch. I’m always happy to help!