When you start a business, you may ask the question, sole or limited company? Putting thought into the structure of the business could be the difference between having a fruitful business or stifling the future opportunities when it comes to getting new clients.
This article will highlight the main points to consider when you set up.
What Is a Limited Company?
A limited company is a business that is an entity in its own right. If you choose to run your business as a limited company, this means you will be setting up an organisation to run your business. Your business will have a legal identity and finances will be kept separate your personal finances. As director of your limited company, you will have limited liability on any losses or debts incurred by the business (hence the name ‘limited’).
Limited companies tend to work on a ‘shares’ basis. Shares are owned by shareholder and a director can also be a shareholder.
All limited companies in the UK need to be registered with Companies House, and they must comply by the regulations of the Companies Act of 2006.
The company pays Corporation tax of 19% on all profits of the business and if the shareholders take Dividends from the remaining profits, this is taxed under Dividends tax. Please see our article “Dividends Tax Explained for Tax Year 2022/23”
What Is a Sole Trader?
A sole trader is self-employed and runs their own business as an individual and are personally responsible for the business. The law sees the business and the sole trader as the same which means they are personally responsible for any losses or debts that the business makes.
Of course, this does mean that you can keep all of the profits after you’ve paid tax on them. Sole traders pay income tax as follows:
2022/23 Income Tax Rates and Thresholds
| Thresholds 2022/23 | Income Tax Rate 2022/23 | |
| Personal Allowance: no tax paid on income in this band. | £0 – £12,570 | 0% |
| Basic-rate tax payers | £12,571 – £50,270 | 20% tax on the proportion of income which falls into this tax bracket. |
| Higher-rate taxpayers | £50,271 – £150,000 | 40% tax on the proportion of income which falls into this tax bracket. |
| Additional-rate taxpayers | £150,001 upwards | 45% tax on the proportion of income which goes above this threshold. |
The Pros and Cons of Working Through a Limited Company
Pros
- As a shareholder, you will always have limited liability. That means you are only ever liable for the investment you made in the business.
- You’re likely to pay less tax as a limited company than you would as a sole trader. This is because as a director, you can pay yourself in a combination of salary and dividends. With dividends having a lower tax threshold than salaried pay, this can mean you are much more tax-efficient than when just paying yourself a salary.
- You can claim more expenses as a business expense when operating as a limited company.
- A limited company could be seen as more professional than a sole trader which could help when seeking out potential clients.
- Investors may see you as more reputable than a sole trader, and your limited company will have its own credit rating which will give you more borrowing power.
Cons
- There is generally more administrative tasks under a limited company which will be more time consuming. However, ProtiQ Accountants take over many of these burdens as part of the Limited company services package.
- As a shareholder, Companies House holds your personal details, available via for the public to see.
- Any critical business decisions will have to be agreed upon by all shareholders unless there is only one shareholder.
- You’ll need to be aware of the pitfalls of IR35. This is avoided under a sole trader. Please speak to us for if you require assistance on this.
- It’s advisable to use the skills of an accountant to get the maximum profitability structure for your limited company.
The pros and cons of Being a Sole Trader
Pros
- Setting up a sole trader is straightforward compared to a limited company.
- Your business details do not get published on Companies House, so your privacy is protected.
- You have full control over your business as there are no shareholders or directors.
- As the sole owner, you can keep all of your business’ profits.
- You avoid the issues of IR35 and disguised employment (those rules only apply to limited companies).
Cons
- You are personally liable for any business losses, meaning that your personal belongings and property are at risk.
- You could end up paying more tax than a limited company specifically the higher earners.
- There’s no one to share accountability with. Whilst you can hire staff, any and all important business decisions fall to you.
- If you are looking to grow your business, the sole trader structure can quickly become quite restrictive especially of investors are looking to buy in.
How do I Become a Sole Trader?
Setting up as a sole trader is a straight forward process. You will need to inform HMRC that you are now self-employed. You can now do this online on https://www.gov.uk/register-for-self-assessment/self-employed. Alternatively you can complete an on-screen form, print off and post to HMRC. This is included in the link above. Remember, you’ll need to have a business name ready when you register.
We provide this service for free with any new clients registering with us.
How do I Become a Limited Company?
This process requires more expertise as there are lots of considerations. Structuring the business with some thought could make the income distribution more efficient. Fortunately, there are specialists who can help you through the process in a simple, quick, and cost-effective way.
ProtiQ Accountants can help with this process and we also provide a structure and health check service for clients to ensure all of our clients know their company is using the best set up for them.
Sole Trader or Limited Company?
The answer to this depends on your personal circumstances. If you are comfortable staying as a small business then being a sole trader may suit you best. However, if you feel your business will grow, then speak to us about getting a structure and health check assessment specific to your needs.
To find out more, please contact ProtiQ Chartered Accountants on 01582 797320.
