Which one – you choose? “Sole Trader vs Limited Company”
by Ashley Adewuyi ACMA MAAT – Lean Accounting Services
Or perhaps the question should be which one do you think is right for your business – going by my experience with clients and people I’ve come into contact with in my line of work, most do not really understand the consequences of making the wrong choice, which can be very costly.
In my opinion many people are quick to incorporate, this is an act of legalising a business by registering it with Companies House, and yes I agree there are many tax savings and efficiencies to be gained from being a Limited Company, but the costs can far out weight the gains if being incorporated is not right for you.
So how do you make the right choice?, the best thing to do is to consult a professional before going ahead with incorporation however the basic rule is, you should not incorporate your business if you fall into one or more of the below categories:
- Your business is new – income is small to none
- You will mostly be trading from home
- Your business profits will not exceed (estimate if you’re not already trading) £8,105 the tax free allowance for financial year2012-13.
If you are a sole trader and you earn this amount or below no tax is payable on it. On the flip side Companies pay tax on all profits earned irrespective of how much it is.
Here is a bit more information on both to help you decide which best is for you.
Sole Trader
Most new businesses are set up this way – it is easy, it is inexpensive and there is very little in the way of red tape. As a sole trader any decisions you make will be instant. Everything you make belongs to you alone (after tax). However, on the flip side, the law makes no distinction between the business and its owner: liability is unlimited, meaning any business debt can be met from the owner’s personal wealth if the business fails.
As a sole trader, your profits are taxed as income by HMRC, and as you are self-employed, your tax will be self-assessed. Initially you will feel better off because many expenses such as business travel and some cost of your premises, even if you are working from home, are tax-deductible. You will have to register for self-assessment with HMRC and fill in a tax return each year, but the paperwork more or less ends there.
Accountancy costs for sole traders are more favourable than for limited companies, starting from around £180 per annum.
Limited Company
Incorporating means registering a limited company at Companies House: it’s a move that will lend credibility to most businesses. It may also make it easier to borrow money when the time comes. But do look carefully at your motives: being the managing director of a limited company may bring status, but you may regret the move when struggling with the year-end accounts.
A limited company is a separate legal entity to the company directors, therefore it is the business itself that shoulders the financial liability if the business goes under. Your home, your family and your lifestyle are protected. The tax regime is also more favourable to a registered company than to a sole trader.
Once you are trading, you will be required to submit full statutory accounts and a company tax return to HMRC each year.
You will also have to file statutory accounts and an annual return to Companies House. Before you can start trading, you need to officially register your limited company, decide on the company officers and choose a name for your business. Then, once you’ve filed the correct documents with Companies House, you are ready to go.
It costs as little as £4.99 to incorporate a business on line, but accountancy costs for limited companies starts from £600 per annum, so before you decide to incorporate please seek professional advice, do not go in blind, being a limited company can bring many benefits, however it can also lead to major headaches if not done for the right reasons.
