Should you trade as a Ltd company or a sole trader?
And if you are one should you change to be the other? Here’s a simplified guide to what’s what and an accountant can advise on what’s best for you, sfter a few calculations you can find out what’s most tax effective and which structure suits you best.
Changing the structure of your business is not something that should be done on a whim. Uprooting a business from its foundations can have dramatic effects if your planning is insufficient or if there are no tangible benefits to changing in the first place.
Before you embark on any structural changes, you should ask the question: is this really necessary and get some advice before you switch. Not yet sure which way to go? Check out our simple guide to the two main options,remember there are also options for business partnerships.
Becoming a sole trader
Working as a sole trader represents the most basic form of doing business. There is minimal paperwork involved, organising your tax affairs is simple (at least compared to limited companies) and there are few statutory obligations to meet, which is good news.
Things get slightly more complicated if you earn more than £82,000 a year, at which point you’ll need to register for, collect and pay VAT.
Employing other people will also mean that you’ll need to set-up suitable payroll infrastructure and submit separate returns – your accountant can do this for you.
This degree of freedom attracts many to the idea of being a sole trader. You are your own boss, and you control the direction of the business. Many of you love the privacy of being a sole trader beacuse your accounts are not public. The downside is that you are solely responsible for your business’s liabilities; if debts remain unpaid or if you make significant losses your personal assets will be at risk.
Forming a limited company
Incorporating your business is an entirely different process to setting up as a sole trader. The opportunities for tax planning are more comprehensive but admin can be complex and there are additional regulations to comply with.
A limited company is owned by its shareholders and run by its directors. Unlike sole traders, your limited company is legally separate from its owner – you. Directors therefore only take on limited liability, for what they have invested in the business.
Here’s the admin part – Compliance with the Companies Act can seem intimidating if you’re thinking about incorporating your business. After registering with Companies House your business will need to:
- file and maintain statutory accounts
- pay corporation tax, PAYE and national insurance (NI) bills
- file VAT returns if applicable
- file CIS returns if applicable
Limited companies have the burden of corporation tax but various tax reliefs are available to mitigate this and extracting profits via dividends and salaries can lower exposure to income tax and NI for directors and shareholders.
Contact our team to find out about business structures today. Call 01603 516 304 for a free no obligation conversation.