Nibletz Staff
All startup businesses have a big decision to make before they even get started – should you work as a sole trader or set up a limited company? Each has their pros and cons, and today, we’re going to take a look at what will be best for any given situation. Let’s get started right away.
What’s the difference between a sole trader and a limited company?
The main difference between the two business structures is all down to tax. If you are self-employed, as a sole trader or a partner in an unincorporated partnership, you will need to do self-assessment every year. You will pay tax on all your business profits and personal income, at a rate of 20%, 40% or 45%, depending on how much you earn. You also need to pay National Insurance Contributions. Class 2 contributions are currently set at £2.75 per week while Class 4 contributions are based on your annual profits.
Limited companies also pay tax – known as Corporation tax – on their profits, at 20% for all profits up to £300,000. However, the major difference is that limited companies can retain their profits and pay them out in dividends in future years. So, directors of the company can withhold paying tax on their dividends in a bad year, and instead, pay it in a good year later on down the line.
What are the advantages of being a sole trader?
There are some advantages of being a sole trader. First of all, it’s easy to do. Just register with HMRC and tell them you are now self-employed, and they will send you self-assessment forms at the end of the year. You can start trading immediately, and if you want to make the switch to a limited company, later on, it is a straightforward process.
It’s also the easiest route if you don’t plan on growing your business so that you need additional employees. It’s an easier way of working, too. You don’t have to fill in much paperwork, and there are few legal obligations involved, unlike with a limited company. You pay tax on everything you earn, minus your expenses and allowances, so it’s a simple way of going about your business.
What are the advantages of setting up a limited company?
While it takes longer to set up a limited company, it has never been easier. There are plenty of firms out there that do company formations for a small fee, and you should be up and running in no time at all. Also, depending on your earnings, you may pay less tax. In general terms, if you earn from £35,000 to £299,999 per year, you will be much better off being a limited company. Also, you don’t have to pay your own National Insurance Contributions.
It’s also important to note that as a limited company, you are a separate legal entity from your business in financial terms. So, you won’t be liable for any claim made against you – which you will be if you’re a sole trader.
Which is best?
It all depends on what you are happy with. There are plenty of pros and cons for each structure, so it’s a good idea to involve an accountant at an early stage to help you through the process. Good luck with the new business!
