Sole Trader or Limited Company: Choosing a Business Structure

Wrappers_TaxAgility-Accountants-LondonThe decision over whether to operate as a sole trader or a Limited Company (Ltd) is rarely an easy one to make, as the structure of your business will have a large impact on the taxes you pay, and how your clients (prospective and current) view your business.

There are advantages and disadvantages to both structures, with your (or your accountant’s) job being to recognise these factors and determine which are most important to your business. Once you choose the structure you’ll be operating under you can change this at any time should another option appear more beneficial. Consider seeking the advice of your accountant before making this decision, as they can outline the tax advantages of each.

Sole Trader

If you choose to operate as a sole trader there’s very little paperwork you’ll need to complete aside from registering for Self-Assessment.

This is because, as a sole trader, the profit you make from your business in a given year is classed as your personal income, and thus you must declare it in an annual Self-Assessment tax return, paying Income Tax and National Insurance Contributions (NICs) on it at the appropriate rate.

Alongside the advantage of having limited paperwork to complete, as a sole trader you’ll also benefit from having easy access to the profits you make (you can withdraw and spend them directly). Operating as a sole trader does have its disadvantages however; as you become personally liable for any losses your business makes or debts it occurs, and some potential clients may have a policy of not working with sole traders.

Limited Company

If you choose to operate as a Limited Company it’s important to know that the legalities and paperwork associated with operating in this way are considerably larger and more complicated than operating as a sole trader. If you don’t already have an accountant, now is the time to get one.

The main advantages of operating your business as a Limited Company is your business will become a completely separate entity to yourself; therefore, unlike those operating as a sole trader, your personal liability (and the liability of your Limited Company’s members: the individuals and businesses who own shares in your company) is limited to the value of the shares you own, but haven’t paid for. A secondary advantage is when you operate your business as a Limited Company, potential clients could be more likely to want to work with you.

The main disadvantages of this structure is the aforementioned legalities and paperwork, including when you set your company up (you must register your company with Companies House), as well as the fact that the profits you make are owned by your company, therefore you can only personally receive them as a salary, dividend, or loan, after your company pays Corporation Tax on them.

Sole Trader or Limited Company – Need Help Deciding?

To speak with a professional small and medium-sized business (SME) accountant to discuss whether operating as a sole trader or a Limited Company is right for your business, contact us today on 020 8780 2349 or get in touch with us via our contact page to arrange a complimentary, no obligation meeting.

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