Limited company or sole trader?
Often one of the first questions when setting up in business, it has far reaching consequences. Here we set out some ‘pros’ and ‘cons’ that should get you thinking. For specific advice call us on 01273 882200 or click the ‘Like to talk’ box and we'll call you back.
Sole Trader
Business profits are taxed under Income Tax rules. Partners are responsible for their respective shares of the profits.
advantages
Flexibility - legislation is less strict on the criteria for business expenses.
Income Tax is payable later than for companies.
Income Tax is paid in three instalments - January of the tax year in which your accounting date falls and the following July and January.
Lower National Insurance costs.
Fewer statutory controls - no audit or registration requirements.
Confidentiality - your financial results do not have to be made public.
Draw your money out whenever, and however, you wish.
disadvantages
‘Unlimited liability’ means that if your business accumulates debts your creditors are entitled to recover from your personal, as well as business, assets.
‘Joint and several liability’ means that your creditors could sue any partner for any sum owed.
NI payments do not provide the same benefits as employees (e.g. sickness, maternity and unemployment benefits).
Some organisations will only deal with limited companies.
You will be taxed on profits even if you do not withdraw the money.
Personal tax rates can be higher than rates for small companies.
Limited Company
It is a separate legal entity, distinct from directors and employees. The company has owners who are the shareholders and who may, or may not, also be directors or employees. Business profits are taxed under Corporation Tax rules.
advantages
'Limited liability' means (provided no personal guarantees are signed) creditors of the company may only recover debts from assets of the company.
Your interest can be easily transferred through the transfer of shares.
Improved benefits from National Insurance.
No other company may use your name.
Profits can be withdrawn as dividends to reduce tax and NI liabilities.
If profits are left in the company, tax rates may be lower.
disadvantages
‘Statutory requirements’ mean that accounts must be in the statutory format.
Accounts must be filed at Companies House.
Audits required for companies with turnover exceeding £6.5m per annum.
Companies must keep proper accounting records.
Higher administration costs.
Directors have legally enforceable responsibilities.
Higher National Insurance costs.
PAYE due on profits withdrawn as salaries and bonuses.
Drawings can only be taken as dividends or salary.
Proposed name could already belong to another company.
Benefits - such as cars - are taxable.
