The legal setup of the business that you are planning to start is a big aspect that you need to decide. It is better to seek the services of a qualified accountant, if you are not quite sure about such matters.
Benefits
Sole Trader vs. Limited Company
- Most businesses make losses in the initial stages. If you have left a high-paying job in order to become self employed, then you can adjust the losses against the income from previous employment and other income such as dividends, interest on savings, rental income, etc. In the case of a Limited Company, it is not possible to offset losses against personal income.
- If your business predominantly involves investment which provides low income on a regular basis and huge payoffs when you sell them in future, you will be paying only less tax as a Sole Trader than as a Limited Company because of low CGT rate of 18% (currently), entrepreneur’s relief and annual exemption.
- The accountancy fee is generally lower for a Sole Trader. However, it can be much higher in the case of a Limited Company because it is essential to comply with Companies Act and submission of annual statutory accounts and returns.
- You can stop operating a business setup as a Sole Trader without much hassles. In the case of a Limited Company, you need to get the name of the company struck off.
- A Sole Trader is only required to file information with HMRC. Companies have to file accounts with Companies House which can be viewed by anyone.
- The profit of a Limited Company is taxed at corporation rates which are lower compared to personal income tax rates.
- The Limited Company legal structure provides some protection in the event of things going bad. Generally, you will not be personally liable to pay all the debts.
- Some businesses find it more comfortable to deal with Limited Companies instead of Sole Trader.
Sole Trader Structure – Some Key Aspects
You need to inform HMRC within three months of starting a Sole Trader business. You are required to pay class 2 National Insurance Contributions (NICs) of about £10 per month, income tax as well as class 4 NICs on the profits that you make. If you have availed a student loan, you are also required to make repayments at 9% of your annual profit in excess of £15,000 – £21,000.
Limited Company Structure – Some Key Aspects
The Limited Company has to pay corporation tax at the rate of 20% if the profits are less that £300,000. As the director of the Limited Company, you can pay yourself a salary to reduce the company’s profits. However, you will be liable to pay income tax and NIC. In addition, the company should pay 13.8% employer’s NIC on your salary exceeding £7,000. You can take dividend from the profit available after paying corporation tax, provided distributable reserves are available. However, you will have to pay tax. You are not required to make any NICs on dividends.