Limited Company vs Sole Trader – Uncover the Right Structure for Your Business!

What is a Sole Trader?

When you’ve registered with HM Revenue and Customs as yourself, this is called a Sole Trader. If you have more than one owner of a sole trader business, this is normally registered as a Partnership. Technically, they are the same thing.

As a sole trader, you will trade for your business with your name, you may have a business name, but everything will go on your self-assessment annually. Also, as a sole trader, you will have a year-end that is aligned with the tax year, and usually, this is the 31st of March each year.

What is a Limited Company?

A limited company is a company that is registered with Companies House and is a separate legal entity. In layman’s terms, it means it’s an imaginary person and rather than you trading as a sole trader as you, you will be trading as a company.

The way you own your company is by holding shares. And these shares define what percentage you own of the company because you don’t just have to be an individual shareholder, You could have your partner, or you can have business partners, and also you could have investors too.

Complexity

As a sole trader is a lot easier to complete, you’ve got one tax return to do, and you’ve got one set of accounts with a profit or loss, and normally a balance sheet if you’re a certain size. Each year normally most sole traders have 31st of March year-end, and the admin burden of being a sole trader is a lot easier.

As a limited company to keep yourself compliant, You have to file accounts annually at Companies House, which for a small company is normally known as abridged where you file an affiliated down version, which shows the balance sheet but not the profit and loss account.

You also have to file a confirmation statement annually, which shows the directors and shareholders of the company. This will also update who owns the company, as well as notify Companies House if there are any persons of significant control. This means in layman’s terms, who has got majority stakes.

So the burden from an admin perspective, from a sole trader and limited company, in the limited company there’s a lot more to do, which will likely involve more costs for you as a business.

What records I am meant to keep?

For HMRC purposes, it’s the same. You need to keep access to all of your income and all of your expenses. With Making Tax Digital, you will need to keep detailed digital receipts of your transactions. So the general record-keeping for a limited company and a sole trader is very similar.

What are the differences in tax?

I’ve lost count of how many prospects I’ve sat in front of, that had some outdated advice. Don’t listen, to everyone because a lot of that advice is outdated and based on tax laws from several years ago.

These current tax times have been mad because it’s changed frantically. But at the moment, if you’re earning above a certain level of profit, which is roughly £40,000, you’re likely to be better as a limited company. This is not a hard and fast rule, and it’s always worth doing proper planning with a really good accountant or tax advisor to make sure that you are making the right decision.

When you’ve got taxes as a sole trader, you’ll be paying your tax and National Insurance normally on a six-monthly basis, you’ll have your tax bill in January and July.

As a limited company, it feels like this is a bit more onerous. You may be running payroll, so you may have tax and NI liabilities, you will also have corporation tax if your company is profitable, and you will also pay dividend tax on your self-assessment. So sometimes this can be really annoying for a business owner because you want to know what your tax bill is going to be, and in a limited company you have to pick it up from various sources and add it together.

Whereas a sole trader is a lot easier because you’re just paying all of your taxes twice a year. However, make sure that you are doing proper assessments on what is the most efficient for you and your business.

What is limited liability?

A legal point in relation to a sole trader and a limited company is limited liability. This means that if someone sues you or goes after you for money as a sole trader, they can go after you personally, which means everything. This is a bit uncomfortable because they could come after your house, they could come after everything that you have.

As a limited company, you’re only bound by the assets and liabilities of the company. Be mindful of this, if you’ve got an overdrawn Director’s Loan Account or you have signed a personal guarantee, then that liability they can chase after you personally. As long as you haven’t done either of them, and you haven’t traded unlawfully and broken the law, people can only go after the assets and liabilities of the company. I think this is powerful, especially in these turbulent times, we have been in. And we’re going to continue in the future.

Prestige

There are a few business owners that I know of that think it’s more prestigious to trade as a limited company. A limited company has a certain status, you’re a director, and you’ve got a company rather than being a sole trader. I think it’s a small point, because ultimately, with small businesses, you’re buying the product or services from the people that are running it. But it is important that some customers may class you as small or discount you if you’re not in the right structure.

Consider your business Strategy!

When you’re in your business, it can sometimes be more efficient and cheaper to set up as a sole trader or wait to grow as a limited company. But sometimes it’s a good challenge to think, a limited company is going to cost me more money, but I’m going to use this as a driver to make more profit. So I’m going to throw that gauntlet on the floor and I’m going to use this to drive me to allow me to make more profits. But this is a personal choice, and it depends on your attitude to risk.

If you’ve got any other questions, I’ll be glad to jump on a discovery call with you. Contact me today, there’ll be no pushy sales pitch and I’ll aim to give you value!