I frequently meet with prospective clients who are seeking advice on whether to start a company as a sole trader or as a limited company. There is no simple answer and this will clearly depend on the specifics of your proposed company. The purpose of this blog is to assist you in making an informed decision.
There are several issues which you should consider before deciding which corporate structure to choose. They include but are not limited to the following:
As a sole trader, you are the business and owner and therefore have full liability for the debts of the company. With a limited company, the business is a separate legal entity. As such, you are not personally liable for the debts of the company
As a sole trader, you would be taxed on your trading income throughout the year. This trading income is taxed as standard Income Tax. You would also pay Class 2 and Class 4 National Insurance Contributions (“NIC”), rather than class 1 NIC, which is deducted at source if you were an employee. As a sole trader, you would also be required to complete a self-assessment tax return each year for your Income Tax and NIC’s.
As a director of a limited company, it differs in that you would have to pay Corporation Tax on the company’s taxable profits. Employees are subject to PAYE and Class 1 NIC’s on their earnings from employment. Further, if you receive additional income by way of a dividend, that dividend would also be taxed. There are of course tax benefits to being an owner of a limited company. By way of example, you can control how you receive your salary and ensure that it is paid to you in the most tax efficient manner. There are also some tax advantages to being a sole trader. They include gaining capital allowances for certain company expenditures which may reduce your taxable income. This is a complex area and we would be pleased to advise you further in this regard.
Once your company has been established, we would strongly advise you to keep accounting records. This is the best way to monitor the performance of your company.
As a director of a limited company, you would be required to prepare annual accounts under the provisions of the Companies Act which are then required by HMRC for Corporation Tax returns.
However, as a sole trader you would only be required to prepare basic annual accounts. You may decide to submit these with your self-assessment return, but there is no requirement to do so.
With regards to the administration and management of the company, as a sole trader, you can do what you deem to be appropriate. As a company director, you are however responsible for adhering to company administration according to statutory regulations with regard to the limited company accounts, statutory books and management. In essence, the duties imposed on a director are more formal than a sole trader and shareholders/directors often find the requirements to be fairly onerous. This is something we would be able to assist you with to ease the burden.
Other Practical Considerations
There are of course many more considerations when deciding whether to start a company as a sole trader or a limited company. Such considerations include how the expenses are going to be dealt with and whether you will want to purchase a company car. Purchasing a company can often bestow a tax saving, but this depends on the business structure chosen. Furthermore, substantial tax savings may be available as the result of incorporation from a sole trader to a limited company. This is something that you should consider as your business grows.
If you are thinking of setting up a business on a small scale, we would recommend setting up a sole trader business. This is to enable you to concentrate on the growth of your business and avoid dealing with the onerous demands that are required with a limited company. However, this decision requires careful consideration and we would recommend that you speak to a specialist accountant or financial advisor before making any final decisions.
If you have any queries, please do not hesitate to contact me.