Sole Trader or Limited Company? Which shall I be?
Are you starting a business and not sure whether you should become a limited company or be a sole trader? Many have heard the terms but are unsure what they actually mean in practice. So to try and help you on your way the main points to remember are:
- Set Up – You just set up as a sole trader, print the cards and off you go. Find a business name being careful not to use one already in use and register with HMRC as self-employed within three months
You have to register a company with Companies House and pay a fee then comply with the laws that relate to a company. Every year you have to file a Confirmation Statement and Annual Accounts with Companies House.
As a sole trader you have to file an annual tax return currently by 31 January each year. You have the usual personal allowance currently £11,000 before you pay income tax currently at 20% until you reach the higher income tax rate.
A company has to file annual accounts with HMRC and pay tax on profits at 20%. Directors are employees and have to pay PAYE on earnings. Earnings taken out as dividends are subject to tax at 7.5% above the tax free allowance of £5000. (To be reduced to £2000 for tax year 2018-2019). The administration is therefore more complicated but there does reach a point where the company is better as Directors can pay themselves dividends which are not subject to national insurance deductions.
A sole trader can keep information about the business and accounts private. A company has to file all manner of information and accounts at Companies House that is open to public inspection
A sole trader by its’ nature is generally a small organisation. A limited company gives the impression of a soundly based organisation and appears more credible. Some businesses will only work with limited companies because of the legal protection a limited company provides
Limited Liability –
There is no distinction between you as a sole trader and you as a private individual. Any business debts are your personal debts and creditors can claim your assets including your home. In the worst case they can make you bankrupt.
A company is a separate legal entity to the people who own it. The liability of shareholders is limited to the value of their shares. The liability of directors is generally nil provided they have acted properly and honestly and not given personal guarantees.
Many businesses start as sole traders because it is simpler and then become companies down the line. If your business has its’ own risks- food, healthcare, beauty products – where you can become embroiled in arguments where you have done nothing wrong a company can been good idea. A client who has come out in spots will always blame you even if they did have an allergy they did not tell you about. If you are limited it will affect your ability to be intimidated.