{"id":6518,"date":"2019-08-23T09:14:16","date_gmt":"2019-08-23T08:14:16","guid":{"rendered":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/?p=6518"},"modified":"2024-09-18T09:51:33","modified_gmt":"2024-09-18T08:51:33","slug":"sole-trader-or-limited-company-what-is-better-for-me","status":"publish","type":"post","link":"https:\/\/www.qualitycompanyformations.co.uk\/blog\/sole-trader-or-limited-company-what-is-better-for-me\/","title":{"rendered":"Sole trader or limited company \u2013 which is better for me?"},"content":{"rendered":"
Every business needs to operate within a defined legal structure. If you\u2019re considering setting up a business, one of the questions you need to ask yourself is whether to be a sole trader or limited company. We will discuss both structures below to help you to make an informed decision that is best for you and your business.<\/p>\n
Being a sole trader means you\u2019re self-employed and can keep any profits you earn after tax. It is important to be aware that, as a sole trader, you will be personally responsible for any losses your business makes.<\/p>\n
Setting up as a sole trader is simple and you can start trading immediately.<\/p>\n
Once you earn more than \u00a31,000 in a tax year (which starts on 6 April and ends on 5 April the following year) you\u2019ll need to register for Self-Assessment<\/a>. If turnover exceeds \u00a390,000 in any 12-month period, you\u2019ll need to register for VAT.<\/p>\n As the most popular business structure in the UK, around 60% of businesses fall into the sole trader category.<\/p>\n This business structure has its own legal identity, separate from that of its owners (aka ‘shareholders’ or ‘members’) and directors (who may also be shareholders). Members of a limited by shares company receive dividends from post-tax profits. Directors are usually paid a salary. If they are also shareholders, directors can receive all or some of their income in the form of dividends.<\/p>\n The limited liability nature of this type of business structure means that the personal assets of members are not at risk if the business runs into financial difficulty. Rather, shareholders only risk losing what they have already invested in the company and\/or agreed to pay for their shares.<\/p>\n There are more legalities involved with running a limited company. The directors, who are legally responsible for all day-to-day management and corporate compliance, must ensure that the company meets its statutory obligations.<\/p>\n This includes preparing annual accounts and confirmation statements (previously the ‘annual return’) with Companies House, submitting tax returns and statutory accounts to HMRC, and adhering to all record-keeping and disclosure requirements prescribed by the Companies Act 2006<\/a>.<\/p>\n Despite this being the most popular business model, there are disadvantages of being a sole trader:<\/p>\n Absolutely. You may decide that you want the security of limited liability or, if profits are flowing in, you may want to benefit from the greater tax efficiencies.<\/p>\n Here are a few things that you’ll have to do if you decide to change the legal structure of your small business:<\/p>\n Whatever your reasons for wanting to make the switch from sole trader to limited company, it\u2019s not difficult to do. You can do it yourself or enlist the help of a company formation agent like Quality Company Formations.<\/p>\n Although more unusual, it is possible. There is a formal winding-up procedure to follow:<\/p>\n Note: As an alternative to company dissolution<\/a>, you may want to make the company dormant, in case you ever need it again in the future.<\/p>\n There is no hard and fast rule. In general, however, operating as a limited company offers more opportunities for tax planning and optimising efficiency. Limited companies currently pay 19%-25% Corporation Tax on profits, compared to 20-45% Income Tax paid on sole trader profits (or 19-48% if you pay Scottish Income Tax).<\/p>\n While directors and shareholders<\/a> are liable to personal tax on any money they receive from their companies, the overall tax liability will generally be lower than if they were to receive the same amount of income as a sole trader.<\/p>\n Reinvesting profits<\/strong>\u00a0\u2013 instead of withdrawing the full extent of profits each year, as is the case with sole traders, it is possible to divert surplus income to pay for equipment, operational costs, taking on new staff, and growing the business. There is more flexibility in terms of timings, as sole traders generally need to utilise any surplus profits in the same financial year in order to avoid paying tax on that income.<\/p>\n Deferring dividends<\/b> – the withdrawal of any profits as dividends can be deferred to a later tax year (e.g. to avoid a higher Income Tax or dividend tax bracket).<\/p>\n The legal structure you choose for your business depends on personal preference and the stage you\u2019re at in your business journey. If you\u2019re a small business with few or no overheads, like a dog walker or content writer, for example, there might be little advantage to setting up a limited company.<\/p>\n However, if your particular business model means that you have a number of suppliers to pay on a regular basis, or your sole trader business starts developing in this way, then you may decide that you\u2019d like the protection that comes from operating as a limited company.<\/p>\n We know this is a difficult decision to choose between sole trader or limited company, so we have created some simple scenarios and made our recommendations for each.<\/p>\n 1. My business will not expose me to financial risk should it fail, my turnover will be small and there will be no reputational benefit from limited company status. We recomme<\/b>nd: Sole trader.<\/strong><\/p>\n 2. I will require paying a lot of suppliers for stock and I will need a bank overdraft facility and possibly a business loan in the first 24 months. We recommend<\/b>:\u00a0 Limited company.<\/strong><\/p>\n 3. My competitors are in general terms quite large businesses who are all limited companies or PLCs. I will require taking a brick and mortar lease for business premises, and other leases for equipment and delivery transport. We recommend<\/b>:\u00a0 Limited company.<\/strong><\/p>\n 4. My 5-year business plan incorporates a steep growth curve where I will be aggressively expanding the business and employing staff. I will have a substantial turnover, with considerable business expenses; therefore, flexibility with regards to tax matters is of interest to me. I may also wish to take on new investors during this period. We recommend:<\/b> Limited company.<\/strong><\/p>\n Please note that the above examples are simply for illustrative purposes, with each recommendation based only on our general opinion. If you are in any doubt about whether to run your small business as a sole trader or limited company, we strongly advise that you obtain professional advice, particularly on any tax-related matters.<\/p>\n What is a private limited company?<\/h2>\n
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What are the advantages of being a sole trader?<\/h2>\n
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What are the disadvantages of being a sole trader?<\/h2>\n
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What are the advantages of being a limited company?<\/h2>\n
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What are the disadvantages of being a limited company?<\/h2>\n
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Can I switch from being a sole trader to a limited company?<\/h2>\n
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Can I change from being a limited company to a sole trader?<\/h2>\n
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What\u2019s better for tax – being a sole trader or limited company?<\/h2>\n
Are some businesses better suited to being a sole trader or limited company?<\/h2>\n
\n<\/b><\/p>\nThe bottom line – sole trader or limited company?<\/h2>\n