LIMITED COMPANY VERSUS A SOLE TRADER

What is a limited company…?

A limited company is a private company; it is a popular business model and legal structure incorporated through Companies House, which provides limited personal liability to the owner/s of a business. As such it is separate from the owners; it can enter into contracts it its own name, is responsible for its own actions, finances and liabilities and the owners are protected by limited liability, meaning they are responsible only for business debts up to the value of their investment or guarantee to the company.

A limited company will be registered at Companies House (the United Kingdom registrar of companies) as ‘limited by shares’, a popular choice amongst businesses, or ‘limited by guarantee’, usually used by non-profit organisations and charities. A limited share company is owned by one or more shareholders, and then managed by one or more directors. A limited guarantee company is owned by one or more guarantors, and then managed by one or more directors

What is a Sole Trader…?

A sole trader is an individual who is self-employed and owns their business. As a result you and your business are legally one and the same; you are entitled to keep all of their profits after tax and you are liable for all losses.

As a sole trader you are responsible for any losses your business may make and for any of your business’ bills.

The advantages of trading as a Limited Company…?

• Your business, personal finances and possessions will be separate entities – as an owner of a limited company you will have limited liability protection, so if something were to happen your personal assets would not be affected (unless there is a personal guarantee made to a company creditor). Basically, the business will own its own equipment, pay its own bills and incur its own debts and they will legally not be attributed to you.
• Post-tax profit benefits – you can pay your post-tax profit as dividend and pay personal tax, you can invest that money and spend it or you can keep the money within the business. Other options include withdrawing your profit, paying a higher rate of tax and then leaving the surplus income in your profit and loss reserves to withdraw later, or you can invest it in a pension or leave it in the company for a capital gain once the business dissolves.
• Better tax opportunities – as a limited company you don’t have to pay Income Tax on account, and you’ll pay 19% Corporation Tax on profits (going down to 17%) . If you were to be a Sole Trader you would pay 20% / 40% / 45% Income Tax on profits as well as Class 4 National Insurance at 9%. You may also be able to make more tax relief claims against salaries, pension, accommodation and other areas.
• You will legally own your business name and it will be protected – once registered your business name can’t be used or registered by anyone else, unlike Sole Traders.
• Customers may prefer working with limited companies to others – it is becoming increasingly common for customers to choose a limited company over others because the connotations of being a limited company are that you are professional and reliable. Customers choose limited companies because they are confident that trading with them will be the best option for them; limited companies are subject to extensive monitoring and reporting processes.
• Investment opportunities – you can sell shares to investors as a limited company and you will find more opportunities to borrow money and secure loans.

The disadvantages of trading as a Limited Company…?

• Accounts – as a sole trader you are required to file a yearly Self-Assessment tax return where as a limited company you are required to file a set of accounts, an annual return/confirmation statement, a corporation tax return and a personal tax return (if you are the company director). The records process is strict. Your accounts must be filed with Companies House within nine months of the businesses year-end.
• Tax – as a limited company you aren’t able to withdraw money from your business bank account as easily as if you were a sole trader. There are strict procedures in place. You can pay yourself a salary from the company, pay yourself dividends on shares and reimburse yourself for business expenses. By taking more money, you pay more tax. As a sole trader you can save tax on other sources of income should there be any loss within the business, and as a limited company can only use any losses against the businesses profits.
• Legal requirements – directors of a limited company need to safeguard all business assets. If the business is unable to sustain itself you will need to stop trading, if you do not there can be consequences.
• Privacy – you will be required to provide company accounts, registers and records for public inspection. Your personal address will be in the public domain too if you trade from home.

What about the advantages of being a sole trader…?

• It can be quick and easy to set up as a sole trader online, and the costs are usually low
• You don’t need to register with Companies House
• There’s no need to pay a registration free to HMRC
• You can easily remove any profits for personal use, and you will own all business profits and assets
• You don’t need to disclose accounts, personal details or business records for public inspection
• There is minimal paperwork and recording keeping requirements

And what are the disadvantages of being a sole trader…?

• It can be difficult to raise the capital you need and acquire loans
• It can only be set up and owned by one individual
• There is unlimited personal liability for debts and legal claims and you are responsible for paying your own tax and NIC
• Your business structure might look slightly less professional than the limited company structure, and    some companies prefer to only do business with limited companies
• There’s no option to defer withdrawals until a later tax year or reinvest surplus cash without paying tax, pension options are less tax efficient and you are unable to issue profits to a spouse or family member as tax-free dividend payments

There are a lot of factors to consider when choosing the most efficient trading vehicle for your business so you should always seek professional advice before deciding – why not book in a meeting at our Wellingborough Office to discuss in further detail!