Sole Trader or Limited Company.

Updated: Sep 28, 2018


Which business structure is best for you and what are the key differences?



Sole trader

A sole trader is when you run your own business as an individual and are self-employed. You can keep all your business profits after you’ve paid tax on them. You’re personally responsible for any losses your business makes. You must file a self assessment tax return to HMRC every year.


Limited Company

A limited company is a separate legal entity to you as an individual. You will usually be a director and shareholder to this legal entity. You're responsible for any legal and financial decisions that the company makes. The company’s assets and liabilities are completely separate from your own personal finances.

We will usually advise you to be paid a salary and/or dividends from the company profits after tax. The company must file annual accounts to Companies House and HMRC. It’s your responsibility as a director of the company to ensure this happens.


Advantages - Limited Company


Limited liability

This is one of the main reasons why clients choose to trade as a limited company. As the company is a separate legal entity, your personal assets are protected. If your company needs to close or experiences financial difficulties, your personal assets cannot be taken from you to pay the company debts. As a sole trader there is no distinction between personal and business assets, therefore personal assets such as the family home could be at risk, especially if the business operates in a risky industry.



Tax planning

As a sole trader, all profits made by your business in that year are taken as income. Therefore you will have to pay income tax and National Insurance Contributions (NIC) based on government thresholds. It does not matter if you leave the money in the bank or not.


Though as a limited company, you’ll pay a flat corporation tax (currently at 19%) on your company profits, and can pay yourself through a combination of dividends and salary. This will minimise your PAYE and NIC outgoings. Any further payments you make to yourself will usually be taken as dividends. The dividends will be taxed from 7.5% if you’re a basic rate tax payer. This way you can avoid going into the high rate tax brackets and can draw dividends at a later date.


Expenses

As a limited company the directors are classed as employees of the business, therefore they can claim tax free benefits and perks. To name a few, mobile phones, business mileage, childcare vouchers, £150 annual Christmas party per employee. Some taxable benefits that could work out beneficial; gym memberships, golf memberships, medical and life insurance.


Pension

Pension contributions are treated differently between the two. As a sole trader you receive tax relief when you are under the high rate threshold. Though as a director through a limited company you may pay 100% of your income, up to a maximum of £40,000 (current tax year) to receive tax relief.

If you earn less than £3,600 annually or don’t earn anything, the maximum amount you can contribute to your pension within the tax relief limit is £3,600 (including government tax relief).


Sideline business

We often have new clients who have started their business on the side whilst still employed. Running the business as a sole trader is o.k as long as you are under the high rate threshold currently £46,350. However, if you are already above this amount your profits will be taxed at 40% (45% if above £150,000).

If you were to form a limited company, the profits would only be at 19% and you could take your tax free dividends (currently £2,000) and avoid paying any further personal tax.


Perception/credibility

Confidence is critical in business, and trading as a limited company enhances your reputation and gives potential customers a sense of professionalism and credibility.

Some larger businesses and organisations simply prefer to work exclusively with limited companies, and some have refused to deal with an unincorporated business. Therefore trading as a limited company can present new business opportunities.


Advantages - Sole Trader


Less paperwork

Both sole traders and directors of limited companies are required to submit a self assessment tax return to HMRC, but those operating a limited company must also submit extra paperwork to regulatory authorities (Corporation Tax, Annual Accounts, VAT returns if VAT registered). Failure to submit returns on time usually results in significant fines and penalties. As a sole trader, you’ll avoid the headache of these returns.


Fee

The accounting process is much simpler for sole traders – there’s less paperwork, fewer expenses to account for and often fewer transactions. Therefore our fee is cheaper for sole traders.


Privacy

Legally, limited companies must be transparent and share certain information with the public, such as filing annual accounts and stating the names of directors and shareholders on public registers at Companies House. As a sole trader, you don’t have to provide this information to Companies House.


Conclusion

Choosing between a sole trader or limited company involves many tax and non-tax issues.

Overall, trading as a limited company can offer benefits of both security and tax advantages at certain profitability levels, however every business is different and a one size fits all approach is not suitable.


Please contact us to discuss your needs in more detail.


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