When setting up a small business, one of the first tasks is to decide upon the legal structure for your new venture. As legal structure can impact your income and the tax you pay, choosing the best option for you can feel like an overwhelming task.
The most popular legal structures in the UK are sole trader and limited company. In the UK, there are currently around 1.9 million limited companies. 3.5 people operating as sole traders, this accounts for 60% of small businesses.
It's an age old question in accounting: Should I be a limited company or sole trader?
First of all, let's define what a sole trader and limited company actually are.
What's a sole trader?
Simply put, a sole trader is a self-employed person who is the sole owner of their business. They are entitled to all profits from the business after tax has been paid but they are liable for all losses. It's the simplest way to run your business.
What's a limited company?
A limited company is a private company that has its own legal identity beyond that of its owners and directors. Owners are only responsible for business debts up to the value of their investments or to what they guarantee to the company. Essentially, all profits and losses are to the company so you act on behalf of the company.
So, why sole trader?
Easy to set up. It's relatively simple to set up as a sole trader. You just need your NI number and to register for self-assessment if you're earned more than £1,000 in the tax year.
Relatively little paperwork. The self-assessment tax return is the main piece of paperwork you'll need to file.
Greater privacy. Incorporated businesses have their details published at Companies House. If you're looking for more privacy, setting up as a sole trader could be a better decision.
However, you may experience problems with raising finance from investors as there is limited room for expansion as a sole trader. When you reach a certain level of earnings, it might not be tax efficient to stay as a sole trader.
And why limited company?
Limited liability. A limited company means the business itself is separate in the eyes of the law from you, the business owners.
Generally speaking, you pay less tax as a limited company. Instead of paying Income Tax, limited companies pay Corporation Tax on profits. This offers a kinder rate of tax to limited companies. A limited company can generally also claim more costs against its profits.
Your name is yours. Once you've registered your company name, no one else can use it.
However, a limited company brings extra responsibilities. The process of going limited can also be time-consuming and costly due to additional paperwork and the incorporation fee. Details of your company's earnings are also shown publicly which may not be appealing to some.
For further guidance specific to your own circumstances, we recommend meeting an accountant. We can also assist in setting up as a sole trader or limited company. For more information and advice, get in touch with Catherine today. Give her a call on 01423 431889 or email catherine@bctaccountants.co.uk.
Please note: all stats are accurate for the 2019/20 tax year.
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