Should I set up as a sole trader or limited company?
We look at the key differences between running as a sole trader or limited company
When you first set up in business you need to decide whether to be a Sole Trader (self employed) or to set up a limited company.
Here are the main points to consider.
- Simple to set up with few legal requirements, the main one being to register with HMRC
- No separation between you and the business, so you keep what you earn and pay tax on your profits. No need for complications like PAYE and dividends
- Sole traders submit information to HMRC on their self-assessment tax return. Tax is paid in January following the year-end, and if the tax bill is more than £1,000 a payment on account is due in January and July
- Many sole traders don’t need to prepare business accounts
- Sole traders can employ staff and be VAT registered the same as any other business
- Tax can be more expensive, particularly if you don’t spend all the money you earn. This is mainly because of National Insurance which companies don’t pay
- Because there’s no separation between you and the business, your personal assets are at risk if the business gets into difficulties
- Two or more sole traders can work in business as a partnership. With a partnership you will each be liable for the others’ business debts if there are problems. The business will also need to submit a partnership tax return to HMRC.
- A company is a legal entity that is separate from its owner(s) – the shareholder(s)
- Because a company is a legal entity it is more complicated to set up. It needs to have at least one shareholder and one director – they can be the same person
- The main reason for having a company is limited liability. This means that a company’s debts belong to the company and not its owners, unless a debt has been personally underwritten by the owners
- Company tax is often lower than self-employed tax. Company directors who are also shareholders have more flexibility as to how they pay themselves
- Having a limited company can give the impression of a more established and stable business
- A company needs to submit documents annually to Companies House
- A set of accounts
- A compliance statement
- Every company has a Company Number allocated to it. It must also have an official address known as a Registered Office. This must be displayed at the address, and recorded on official documents along with the registration number
- Details of the company directors, shareholders and finances are on public record at Companies House
- Companies pay corporation tax annually, 9 months after the year-end, unless they have profits in excess of £1.5m in which case they pay by instalments
Setting up your own business? Check out the rest of our Business Fundamentals series here.