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Sole Trader Vs Limited Company

When starting out on your own, it can be quite daunting! Registering at Companies House for your business makes it all real. Many people that are starting up chose to become a sole trader for ease as its less of an administrative burden than being a limited company business.

There are many benefits of staying a Sole Trader such as not having to pay Corporation Tax and still being able to offset certain purchases against your profits to reduce your personal tax. You should always speak with your accountant regarding tax as you need to be sure that you are claiming all the correct tax relief.

On the other hand, becoming a limited company also has many benefits that should be considered. One of the main areas for consideration is the liability risk.  As a sole trader you are ultimately liable for everything that happens within your business, so if you have an unhappy client who decides to sue you, your personal assets could be at risk, henceforth moving to a limited company offers you protection for you and your family.

You should consider the differences:

Sole TraderLimited Company
You can trade using your own name or another name. There is no need for this name to be registered.You must choose a unique business name to register.
Unlimited liability – you are held personally responsible for business debts and legal disputes

If your business fails, you are at risk of personal bankruptcy.

Limited liability – the company is held responsible for business debts and legal disputes (limited exceptions apply)

If the business fails, the company is at risk of insolvency (i.e. corporate ‘bankruptcy’), not the shareholder(s) or director(s)

Owned by one person onlyCan be owned by one or more people, who are known as ‘members’ or ‘shareholders’

Managed by one or more people, who are known as ‘directors’

All business income belongs to youBusiness income belongs to the company until it is transferred to you as:
  • a director’s salary
  • expenses
  • shareholder dividends
You pay Income Tax (20-45%) and National Insurance contributions (Class 2 and Class 4) through Self-Assessment on all declared business profits above your tax-free Personal Allowance (PA)You pay Income Tax and Class 1 National Insurance contributions (NIC) through PAYE on your director’s salary (above your PA)

 You pay dividend tax (7.5%-38.1%) through Self-Assessment on dividend income above your PA and the £2,000 tax-free Dividend Allowance. These tax rates are lower than Income Tax rates

The company pays a flat rate of 19% Corporation Tax on all taxable profits. This is lower than Income Tax rates.

You can minimise your personal tax and NIC liabilities by taking a lower salary and higher dividends
No information about you or your business is made available to the public by HMRCCompany information is a matter of public record, including accounts and certain details relating to directors and shareholders
No legal requirement to keep or submit accounts, though it is beneficial to do soIt is a legal requirement to prepare annual accounts for Companies House and HMRC
Tax relief on mobile phones and computers will be apportioned according to business and private use – an add-back of capital allowances will applyMobile phones and computers are tax-free if they are purchased by the company

More tax-free benefits available through a company, including parking charges, public transport, travel costs, health checks, eye tests and prescription eyewear, childcare, and school fees

Can I change from being a Sole Trader to be a Limited Company?

If you would like to convert from being a Sole Trader to a Limited Company, the first thing that you need to do is register your business at Companies House, you need to make sure that you have decided on what your business name is going to be.  If this is something that you would like us to help you with we have a team of people that can work with you on this.

Next you need to inform the HMRC that you are no longer trading as a Sole Trader, to do this you need to complete this online form, along with this you will need to submit your final Self-Assessment Tax Return for your Sole Trader business by the 31 January after the end of the year tax.

If you had any assets in your sole trader business you may need to transfer the ownership over to your new limited company.

Make sure you set up a company bank account as this keeps your business finances separate to yours. Finally you need to make sure that you register for PAYE (Pay as you earn)

If you would like to discuss this further with one of our advisers please get in touch, please give us a call on 01922 922050 or drop us an email hello@bkplus.co.uk

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