As a business owner, you can be overwhelmed by the number of decisions you have to make. One of the first parts of starting your business is to consider if you should start as a Limited Company or as a Sole Trader. There are some key differences between the two of these, and we will be sharing some of these in this article. Let’s dive in.
Limited Company vs. Sole Trader
Liabilities As the name suggests the liabilities of the company are Limited to the company itself as the Limited company is treated as a separate legal entity by law from its shareholders and the directors. This means none of your personal finances or assets are in danger should any issues arise for the business. This also means that any legal action will be taken against the company, rather than you personally. Note: The directors’ are personally liable only in the rare events of fraud or misconduct.
The Sole Trader business does not have the status of separate legal entity and as an owner you could be personally liable against any claims or the liabilities.Tax If you are a limited company owner you only pay corporation tax on your profits, and dividend tax on the dividends you withdraw at the end of the year. You also have a range of tax-deductible costs that are not available to Sole Traders.
As a Director or Shareholder and employee of the company, you pay yourself through a combination of dividends and salary (usually set at the primary threshold for National Insurance, and this is an allowable expense in the business). This will minimise your PAYE (tax you pay on your earnings throughout the year) and NIC outgoings. Any further payments you make to yourself will usually be taken as dividends. You can also pay yourself a salary between Lower Earning Limit and Primary Threshold that will protect your National Insurance benefits but you won’t actually pay any National InsuranceCompanies currently pay tax at a flat rate of 19%Sole traders will have to pay tax on all of the profits that are above their personal tax allowance which is updated by the HMRC each year. All of the profits made by your business are taken as income. You’ll pay income tax and National Insurance Contributions (NIC) based on government thresholds.
Sole traders, depending on their profits can pay tax at up to 45% on their incomeAccountsYou must file annual accounts with Companies House. You will also need to annually file a Corporation tax return, as well as the accounts with HMRC.You are under no obligation to actually file any of the accounts that a limited company owner has to, you must file your Self Assessment tax return each year.
As a Limited Company you may appear more reputable, larger, and more committed than a Sole Trader to some contracts and clients. You will also have your company details, and Director or Shareholder details published publicly on Companies House. Relationships with clients and contractors may be felt as more personal and bespoke. Your company details are not on Companies House for people to find. Business NameYour company name is protected once registered as a Limited company. Sole traders do not have a company but a business. Your business name can be taken or used by others, as it is not registered.
