Limited Company or Sole Trader

Once you've decided to take the plunge and start your own business, one of the first big decisions is whether you set yourself up as a Limited Company or Sole Trader. Choosing the right  legal structure will depend on your personal situation and future plans for the business and there are pros and cons for each. So, what's the difference between a Limited Company and a Sole Trader? Read on to find out more.

Liability

The clue's in the name, but with a Limited Company, you have limited risk - any debts are those of the company, and not yours personally, so your financial risk is limited to the amount of capital you invest in the business.

If you set up a Sole Trader, there is no legal distinction between you and the business. This means that you are personally liable for any debts or losses the business may occur. 

Tax

With a Limited Company, you'll have to pay corporation tax on any profits you make, but you don't pay any personal tax until you withdraw money from the business. This gives greater flexibility over how and when to take profits from the business, potentially being able to make use of your annual tax-free dividend allowance.

As a Sole Trader, your profits are included with any other sources of income you have, on your self assessment tax return, with PAYE and national insurance being payable, depending on your personal circumstances.

Administrational burden

As a Limited Company, you will need to file annual accounts with Companies House and an annual tax return with HMRC. In addition you will need to file annual returns with Companies House and let them know of any changes to the business.

As a Sole Trader, there's less paperwork - the main submission is your annual self assessment tax return - if you're not filling one already, you'll have to start.

If you're taking on the administration and finances of the business yourself, you're likely to need to register for a cloud accounting software solution. The licence fee for a Limited Company is likely to be marginally higher than for a Sole Trader, due to the additional requirements.

Registration

To register as a Limited Company, you'll first register the business with Companies House and will need to sign for corporation tax with HMRC shortly after. 

As a sole trader, you need to register with HMRC by 5th October in the business' second tax year, so that you are able to complete your self assessment return by the following January.

Conclusion

Unfortunately, there's no hard and fast rules , but generally speaking, you may be better served by setting up a Limited Company if:

• your business is high risk in terms of potential liability;

• you have an income from another job; or

• you expect the business to be large, or grow in the future.

Give us a call for a no obligation chat to find out more.