We have written about company structure before, but we believe this is a very important topic. The benefits of being a sole trader vs. setting up a Limited Company do need to be reviewed occasionally by business owners, especially with all the changes we have had recently with corporation tax.
If you are a start-up business, this will help you decide on the best company structure from day one. Businesses that have been established for a while can change their company structure at any time.
Operating as a sole trader
As a sole trader, you have complete control over your business decisions, retain all the profits, and have simplified tax obligations.
- It's simple to set up your business. You just need to inform HMRC and register for Self-Assessment online. You can then start trading straight away.
- The accounting process is more straightforward. You need to keep a record of your income and expenditures and then send all these to your account at the end of the financial year so they can prepare your tax return. The accountancy fees are less than when you are a Limited Company.
- Managing your tax payments is more streamlined. Your personal allowance for 23/24 is £12,570
- You must pay your tax bill on 31 January each year after you have filed your tax return. Tax is paid at the basic rate of 20% for earnings between £12,570 and £50,270. The higher rate of 40% is paid for earnings above £50,270.
- National Insurance – Class 2 and 4 contributions are paid on all profits while paying your tax.
- Regarding pension, the 23/24 allowance states that you can pay 100% of your net profits or £60,000 a year, whichever is the lower.
- You can be VAT registered as a sole trader, in which case you must keep a record of tax paid on income and expenditures and submit a VAT return. This process is the same whether you are a sole trader or a Limited Company.
The main challenge of being a sole trader is that raising capital can be more difficult. You can, however, look for grants, particularly any from local authorities or organisations like The Chamber of Commerce.
The other downside is that there is minimal separation between you and your business; you could be personally liable for any business debts. So, it's essential to monitor cash flow and ensure you get advice from your accountant early on if you face any financial challenges.
Setting up a Limited Company
Operating as a Limited company gives you a better distinction between your personal and your business finances. It is one of the most common business structures and works well for several reasons.
- The main benefit is that you reduce the risk of personal liability. The company is separate from your own finances, and any debts or losses are the responsibility of the company.
- Once you register your business at Companies House, your business name is protected. This helps as other businesses can't offer similar products or services by registering a name that is the same or very similar.
- Limited Companies are often perceived to have better professional status as they are more rigorously monitored. This can help if you apply for investment or want to attract more prominent clients in the UK or abroad.
- From April 2024 the 19% small profits rate will be payable by companies with profits of £50,000 or less.
- Companies with profits between £50,001 and £250,000 will pay tax at the main rate reduced by marginal relief, gradually increasing the effective Corporation Tax rate.
- You can contribute 100% of your earnings towards your pension. This excludes dividends and is not subject to capital gains or income tax.
- As a Company Director you can reduce your tax liabilities and NI contributions by taking a combination of a director’s salary through PAYE and dividend payments from shares.
The main disadvantage of setting up a Limited Company is the set-up process, which can be more time-consuming than for a sole trader. You must be incorporated at Companies House and pay an incorporation fee. You then need to appoint directors, nominate shareholders, and prepare all your legal documents.
There are also more administrative requirements, and having an accountant helps comply with all the rules and regulations. Often, they can function as your Company Secretary, which takes the pressure off you.
As mentioned earlier, you can change your company structure at any time depending on the needs of your business. If you would like to discuss which structure would be best for you, please get in touch by calling 01623 490 120 or email