Whatever structure you pick for your business, there’ll be lasting changes to how you operate.
It’s vital to pick the right structure for your business – especially if you’re only behaving in a certain way.
This choice is usually running the business as a limited company or acting as a sole trader.
They both have their benefits and are very different in how they affect your day-to-day. For many, it’s a decision between moving from a sole trader to a limited company.
In this article, we’ll cover all you need to know about the differences between sole traders and limited companies and how to choose.
What’s the difference?
Besides being called completely different things, there are some key differences between the two.
A sole trader is completely responsible for their business – according to law they’re the same entity. There is no difference between the two.
As a sole trader, you earn what the business earns – you’re also solely responsible for your debts.
Whereas as a limited company director, you’re completely separate from the business.
A company has it’s own finances, assets and accounts, and will usually operate under it’s own name, separate to yours (bucking the trend are businesses like Tom Ford or Georgio Armani).
Sole trader – advantages and disadvantages
There are several advantages to running your business as a sole trader.
It’s a straightforward and adaptable company model. Less documentation is required, such as fewer registrations and one tax return you must complete annually on or before January 31.
Additionally, starting a business as a single proprietor is exceptionally easy – you can start trading straight away, without having to contact HMRC (bar a self assessment registration) or Companies House.
If you make a lot of money, be ready for a bigger tax bill. All of your business profits will be taxed as income at one of three rates, which are all greater than the corporation tax that businesses pay.
And since you’re the company, if something goes wrong, your personal assets can be at risk.
Limited company – advantages and disadvantages
A limited company owns its assets, so if it faces financial difficulties, the company director’s personal assets will be secure.
Since profits are taxed at 19% from the beginning of the 2021/22 tax year, limited firms often obtain better tax treatment than sole traders. This is because income tax is higher.
Although a business director must undoubtedly take a portion of the company’s profits as income, they do have methods at their disposal to minimise taxes, possibly even more so than highly successful sole traders.
As a director of a limited business, you should maintain your compensation below the amount that disqualifies you from class 2 National Insurance in order to minimise your tax liability.
As dividends are likewise taxed at a lower rate than regular income, you should supplement your payments with them.
But managing a limited firm is challenging. There are additional duties, such as filing corporate tax, keeping statutory records, and registering with Companies House.
It’s costly, but these costs can be offset if you’re making enough to really benefit from the tax treatment.
Trying to decide whether to incorporate your business or act as a sole trader is no light decision. By getting in touch with the team at Blue Shore, you’ll be able to have any of your questions on the matter answered by our highly-trained team of professionals.
Talk to us about the best way to operate your business.