Sole Trader or Limited Company: 3 Things To Consider!

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When setting up a new business it can be difficult deciding whether to incorporate your business or not. When you’re a sole trader, you and your small business are legally one and the same. But if you turn your business into a limited company the company becomes a separate legal entity from you. This is known as incorporation.

Making this decision can be difficult, but at Future Cloud we are here to help you! Here are 3 key considerations you should be making when comparing a sole trader to a limited company!

Tax Implications

Being a sole trader can be tax efficient for businesses with small profits. As a sole trader you are considered to be ‘self-employed’. This means that you employ yourself and pay yourself – though you may pay other staff members if you choose to take them on. So, if you’re the single owner of your business, unless you hire another staff member, you’ll get to keep 100% of your after-tax profits.

Tax and national insurance requirements are more complex for a limited company. Any losses made by a limited company can only be used against the company’s own profits. When you’re a self-employed sole trader, on the other hand, you can usually use a loss to reduce your overall income tax. However, many owners of limited companies pay themselves in a combination of dividends and salary. The advantage here is that dividends have a lower tax threshold, which can make earning more tax efficient.

Legal Responsibilities of Administrative Work

As a sole trader, you must register with HM Revenue & Customs for self-assessment as soon as you start trading. Once you have registered, you’ll be given a unique tax reference (UTR) number, and you’ll just need to remember to file your self-assessment once a year. Whilst this is quite minimal in terms of administrative work; you can seek help from an accountant, who can sort these jobs for you!

Legal responsibilities are more extensive for a limited company. You have to file a set of accounts, a confirmation statement, and a Company Tax Return to HMRC each year. When you file your company’s accounts and confirmation statement, these documents will be in the public domain, and available for anyone to see on sites such as Companies House. These legal responsibilities are just that, and should you fail to produce these documents each year, you will be opening yourself up to fines or more serious consequences like prosecution.

Administrative work for limited companies can be more complicated and lengthier compared to that of a sole trader.

Profits and Liabilities

As a sole trader, you can keep your profits after tax; however, you are also personally responsible for any debts of your business and liable for all losses. This can leave you open to bankruptcy and financial burden. However, if you are a sole trader with no employees you may need to consider how overwhelming the day-to-day running of the business might be for you.

On the other hand, a limited company is a separate legal entity from its director(s) so the owners are not responsible for any business liabilities, and their personal assets are not tied to the company. That means that shareholders and directors cannot be pursued personally for any debts the company incurs.

So, is there a way to settle the debate? Choosing between ‘setting up as a sole trader vs limited company’ really depends on your business structure, profits and how you feel you can handle administration and liability. Typically, tradespeople who deal with individuals and offer services tend to opt for sole trader status whereas a business with multiple staff members and plans to scale may feel more suited to a limited company structure.

This blog does not include all the considerations you might want to make when making the decision between sole trader and limited company. Don’t struggle with the decision yourself; reach out to the right accountant!

If you’re still weighing up the pros and cons, contact Future Cloud Accounting today for a call with one of our team members. We’re always here to help!

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