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When you are ready to launch your business, one of the first key decisions is choosing a business structure that suits you best.

Choosing to run your business as a sole proprietorship or as a limited company depends largely on the type of business you run, how you want to run it, and your aspirations when it comes to growing your business.

The business structure that you choose can determine:

  • How much tax you pay
  • If you are considered the owner of the business or an employee
  • How far you want to protect your personal liability
  • How much control you want to have over the business
  • How much you want to pay to maintain the company
  • How much administrative work you want to do it yourself

It is worth mentioning that you can change your business structure at some point through your business journey. For instance, you may choose to start with sole proprietorship but as your business expands, you take on staff and forge new partnerships. These new commitments may make a limited company more suitable to your business needs and you make the switch accordingly.

Having said that, getting the business structure right from the start can potentially save you time, money and effort. If there are concerns you would like to address, contact one of our small business accountants today and we’d be happy to discuss any issues surrounding sole proprietorship or limited company.

Sole trader

Being a sole trader or setting up a sole proprietorship is the simplest and also the most popular business structure in the UK, but it comes with a big catch – you are legally responsible for all aspects of the business including its finances. The statement seems alright at first glance, but it is the implications that you should pay your attention to. What it means is that you are personally liable for all the income your sole proprietorship receives as well as all the losses your business incurs, which can put your personal assets at risk when things go bad.

Here is a quick example
Your business goes through a bit of a rough patch and the business owes suppliers a sum of money. Because your business is essentially you (there is no separation in the eyes of the law), your creditors (in this case your suppliers) can file for County Court Judgements against you, putting both your business and your personal assets (property, money, possessions) at risk.

So let’s look at the advantages, disadvantages and tax responsibilities of a sole trader:

Advantages of a sole trader

  • Easy to set-up
  • Small administrative burden
  • Small up-keep cost
  • You have complete control on how the business is ran (as there aren’t any other shareholders)
  • You have privacy – your name is not published on the Companies House website
  • In most instances, you have less accounting work than a limited company too
  • As there is no separation between your sole proprietorship and you, you can access the profit anytime you like

Disadvantages of a sole trader

  • You have unlimited liability, meaning if something goes bad, your personal assets (property, money and possessions) are at risk
  • As liability is an issue, some businesses are less reluctant to deal with a sole trader
  • Because you are personally liable for all the income your business generates, you may be paying a lot of tax as a sole trader when your business booms
  • You cannot split your business profits or losses with family members
  • Rightly or wrongly, business people tend to view sole proprietorship as something less serious

Tax responsibilities of a sole trader

  • You must keep all financial records (income and expenses) for at least five years
  • You must send a Self Assessment tax return to HMRC every year
  • You pay Income Tax and National Insurance
  • If you are VAT-registered, you must file a VAT return

Limited company

Before launching your business, your friends and business associates are likely to encourage you to set-up a limited company due to its distinct advantages. So let us go straight into highlighting the advantages, disadvantages and tax responsibilities of a limited company.

Advantages of a limited company

  • The biggest advantage is that your liability as a shareholder is limited
  • You can reduce your tax obligations legitimately by taking a low salary and using dividends (which is taxed at a lower rate) to make up your income
  • You can also split your business profits or losses with family members
  • You can transfer ownership by selling shares to another party
  • The business structure is respected
  • A limited company tends to have wider access to capital and funding than a sole proprietorship
  • The name of your company is protected; no one else can use the same name as your company once you have registered
  • Your company can contribute pre-tax income to your pensions
  • Your company may qualify for some types of relief

Disadvantages of a limited company

  • The set-up cost is higher than a sole proprietorship
  • The running costs are also higher than a sole proprietorship
  • Your limited company is owned by shareholders and managed by directors – you have full control only if you are the only shareholder and director
  • As a director and/or significant owner, your name is published on the Companies House website
  • The financial information of the company is also published on Companies House
  • If you fail to meet your legal obligations, you may be held liable for the company’s debt
  • Even if you hire an accountant to manage your day-to-day tasks, you are still legally responsible for your company’s records, accounts and performance.

Tax responsibilities of a limited company

  • A limited company must keep good financial records and report changes
  • A limited company must complete corporation tax return and pay corporation tax on its profits
  • A confirmation statement and annual accounts must be sent to Companies House each year
  • File a VAT return if the company is VAT-registered

Reducing your tax obligations through a limited company

In the article Incorporating a limited company, we share two scenarios on how a director of a limited company can reduce their tax obligations and increase their tax-home pay by spreading the income between salaries and dividends. If you are interested to know more, follow the link and have a read.

Sole Trader or Limited Company – need help deciding?

Making the decision to launch your own business is the first step that you take towards fulfilling your dreams; now this step of choosing a business structure that suits you will reinforce your commitment.

At Tax Agility, our small business accountants have helped countless entrepreneurs set up their limited companies over the years. Moreover, we continue to support them throughout their business journey, assisting with company accounts, payroll and tax matters. In some instances, we even help to implement financial disciplines that are unique to your business, reigning in the appropriate level of financial control so your company can grow and expand quickly but sensibly.

If you would like to talk to one of our small business accountants regarding your accounting needs (for either your sole proprietorship or limited company), give us a call on 020 8108 0090 or fill in our online form.


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This blog is a general summary. It should not replace professional advice tailored to your specific circumstance.