Sole trader vs limited company
If you want to start your own business but don't know what fits your company the best , this article will help you to learn about definitions, advantages and disadvantages of trading as a sole trader or limited company. Don't rush into a decision, think and choose wisely what the best fit for your business.
you run your business as an individual and self-employed
it's the simplest business structure
you can trade under your own name, or you can choose another name for your business
you can keep the profits after you've paid tax on them
you need to file Self Assessment Tax Return every year by 31 January
you pay Income Tax (20% if the profits are higher than the tax-free amount of £12 500 for year 2019/2020)
you pay National Insurance ( for tax year 2019/2020: Class 2 which is £3 a week if your profits are between £6,365 and £8,632 and Class 4 if your profits are more than £8,632 a year which could be 9% on profits between £8,632 and £50,000 and 2% on profits over £50,000 )
easy to set-up
small administrative burden involved
low costs of running
greater privacy, because your details cannot be found on Companies House
you’re personally responsible for any losses your business makes. The unlimited liability, this means that if your business gets into debts than you are personally liable. So you could lose your property or belongings.
could be tax inefficient once your profit goes over a certain threshold
your business name is not protected
is legally separate from the people who run it
has separate finances from your personal ones
has shares and shareholders
can keep any profits it makes after paying tax
you have 9 months after your company's financial year ends to file accounts and pay Corporation Tax
you pay Corporation Tax (19%) on profit
a separate legal entity, this means that if something goes wrong your personal asset cannot be taken from you to pay debts
usually more tax efficient when your earnings go over a certain threshold
your company name is protected. Once you choose your name, nobody else can use it
details about Directors and business are public what could be both advantage and disadvantage
more professional image
funding might be a little easier for the company as banks and other investors tend to prefer limited companies
greater administrative responsibility
more responsibilities for Directors what can be costly and time-consuming, as you’ll need to either deal with this extra paperwork yourself or hire an accountant
less privacy as details about your business and Directors can be found via Companies House
Whether making a decision to work as a sole trader or set up a limited company, think about your personal situation, your goals, how much time do you want to devote to your business.
Do you work for yourself just in your spare time and treat it as an additional stream of income? Or is it your main source of income?
If you would like to make sure that you choose the best and the most tax efficient option, we are here for you.