🧐 Thinking about starting a business but can't decide whether to register as a sole trader or a Limited company?
Starting a business is a huge step and knowing how different types of businesses operate will make running your business a lot easier. Below are some key differences between operating as a sole trader and a limited company.
👤 As a sole trader, you are the business, the owner and the manager. In the event of any legal dispute, you will be sued personally unless you have suitable insurance cover.
🏢 As a limited company, the business is a separate entity, you are a shareholder and you serve the company as a director. In the event of any legal dispute, the company will be sued unless it has suitable insurance cover.
👤 As a sole trader you are self-employed; you cannot be your own employee.
🏢 As a limited company, you are a but this does not automatically make you an employee in terms of employment law, the National Minimum Wage or for Tax Credits. For Income Tax and National Insurance purposes company officers are treated as employees.
Tax on profits:
👤 As a sole trader you are self-employed and will be in charge of paying your own taxes including Income tax and National Insurance.
🏢 As a limited company you are an employee of the business and the company must pay corporation tax as well as PAYE and National insurance
👤 As a sole trader you can withdraw as much money as you like from your profits without any tax effect.
🏢 As a limited company you must be on a salary to be paid. There is no restriction to how big your salary is, any amounts withdrawn from the business that do not relate to your salary must be paid back to the business.
👤 You are free to borrow from the business bank account, it is your account. If your business bank runs at an overdraft due to the amount of funds that you have withdrawn personally, tax relief on bank charges and interest will be proportionately restricted.
🏢 As a Limited company borrowing by directors is allowed. Limits are set by the Companies Act 2006, but there are tax costs. The company will pay a tax charge of 32.5% if you borrow from the company and do not repay the loan within nine months of the year-end.
👤 As a sole trader If the business fails you will be personally (or jointly with your partners) liable for its debts. You may go bankrupt.
🏢 As a limited company If the company fails, your liability is limited to the amount unpaid on your shares (if any) unless you have made a personal guarantee for the company's borrowing (which is often required by banks).
👤 As a sole trader there is no requirement that you prepare accounts for tax purposes unless you are within Making Tax Digital for VAT: this imposes extra record keeping. However you may find that it is difficult to keep on top of your business, collect debts and work out profits without keeping accounts
🏢 As a limited company you must prepare annual accounts under the provisions of the Companies Act, these can be abbreviated for filing with Companies House. HMRC require full accounts for Corporation Tax which must be submitted online in iXBRL.
Expenses in general:
👤 As a sole trader you obtain tax relief for expenses that are incurred for the purposes of the trade. If you can identify a proportion of an expense that relates to business you can claim the same proportion against tax.
🏢 As a limited company. The company obtains tax relief for its expenses if they are incurred for the purposes of the trade. If a director incurs private expenses through the company, they may be treated as earnings. If they are a shareholder, the amounts are treated as distributions.
If you are unsure what the best way to operate for your business is, send us an email at email@example.com and we’ll talk you through the best option for you