Starting a Business: Should You Choose Sole Trader or Limited Company?

When you’re getting your business off the ground, one of the first big choices is whether to be a sole trader or a limited company. This choice affects how your business handles taxes and other matters. Let’s break down the basics of each option so you can decide what’s best for you.

Sole Trader vs. Limited Company: What’s the Difference?

Sole Trader:

• You and your business are legally the same. No separation.
• You’re personally responsible for legal and financial aspects, including debts.
• Suitable for lower-risk businesses with smaller upfront costs.
• You keep all after-tax profits but pay Income Tax on them.

Limited Company:

• Business is a separate entity from you, offering more personal liability protection.
• Company’s debts are not your personal responsibility.
• Suitable for higher-risk businesses with larger upfront costs.
• You need a formal way to pay yourself, usually through salary and dividends.
• Profits remain in the business until you decide to pay them to yourself.
• More complex reporting: Company Tax Return, accounts to Companies House, and possibly a Self Assessment for personal income

Key Points to Consider:

1. Liability and Risk:
   • As a sole trader, you’re personally liable for debts and legal issues.
   • Limited companies offer more protection as debts are the company’s responsibility, not yours.
2. Paying Yourself:
   • Sole traders can keep all after-tax profits.
   • Limited companies require a formal payment process involving salary and dividends.
3. Tax Efficiency:
   • Sole traders pay Income Tax on profits, regardless of personal use.
   • Limited companies let you keep profits in the business, allowing for tax-efficient payment strategies.
4. Privacy:
   • Sole traders have less public reporting; limited companies need to register with Companies House and share certain information.
5. Reporting and Deadlines:
   • Sole traders submit a Self Assessment tax return to report income.
   • Limited companies have more paperwork, including Company Tax Return and accounts to Companies House.

Registering Your Business:

• Sole Trader: Register for Self Assessment with HMRC by October 5th of the second tax year.
• Limited Company: Register with Companies House, automatically enrolling for Corporation Tax with HMRC. Involves more paperwork and a fee.

Choosing Your Structure:

Think about these factors:

• Profit Level: If it’s around £30,000 or more, a limited company might offer tax advantages.
• Business Risk: If your business involves a lot of liability or large transactions, a limited company could protect your personal assets
• Other Income: If you have income from another job, a limited company could provide tax benefits.

Remember, everyone’s situation is unique. If you’re unsure, please don’t hesitate to contact our helpful team on 02392388003 or [book a discovery call]