When you start looking into setting up a business, you will hear many different opinions on what one is the right option.
Choosing the right structure depends on lots of different factors and your own personal circumstances! It is not a one size fits all, some of the areas you need to consider are:
- Are you going to be going for any business funding?
- Is the nature of your business quite risky?
- If something goes wrong, could you potentially be sued?
- Are you looking to be VAT registered?
- How much other income do you have?
- What size company do you want to reach?
These are some of the crucial questions you need to ask yourself. If you are looking to build a scalable business then a limited company is usually the way to go.
The Pros of Being a Limited Company
1. Business Debts Are Not Tied Personally To You
Many business owners seem to forget that a limited company is a separate legal entity! The business finances and your own finances are completely separate and the same goes for its liabilities. This means that (provided you have acted reasonably), you will not be personally liable for any business debts you cannot pay.
2. Makes The Business Look More Established
Some companies prefer to work with limited companies compared to sole traders. Even though it is not always the case, limited companies appear to be professional and established.
3. Usually More Tax Efficient from a tax perspective, you are treated separately from the Limited company. Once you start earning a certain level of profit, you will pay less tax operating as a limited company.
4. Finances Can Be Easier To Secure
Financing companies tend to be easier to deal with as a Limited Company compared to a Sole Trader.
5. Separate Business & Personal Finances
It is a legal requirement to have a separate business account for your business. This will help you maintain your business and personal finances more comfortably.
The Cons Of Being A Limited Company
1. They Are More Complex To Set Up
There are a few extra steps but nothing crazy! We provide free incorporations for start-ups so you don’t need to worry about this.
2. There is More Compliance
As a limited company, you will have to produce a tax return for that limited company (this is different from your personal assessment!), which will include the company profits and taxes. In addition, you will need to still file a personal self-assessment to show what you have earned/taken from the limited company as in salary/dividends.
3. Details of Your Business Are Published Online
Your name, date of birth, address and balance sheet can be publicly viewed (we allow our clients to use our Registered Address for a small fee which will keep your address private and HMRC correspondence handled).
4. Rules Around Withdrawing Money
As a limited company, the tax-efficient way to withdraw your earnings is to take a small salary and the remaining earnings in dividends. Watch out for the director’s loan account, as if you take out more than you should, you can be taxed heavily as a result.
The Pros Of Being A Sole Trader
1. Easy To Set Up and Close Down
The process of setting up as a Sole Trader is very simple!
2. Low Start-Up Costs
There is no charge at HMRC to set up a Sole Trader however as a Limited company there is a £12 charge from HMRC.
3. Your Information Is Not Published Online
As Sole Trader, you have to complete a Self-Assessment which is only seen between you and HMRC.
4. Can Offset Against PAYE Income
If you have made a loss, you can choose to offset it against any future losses or your PAYE Income and potentially receive a refund.
5. Tax-Free Trading Allowance Sole
Being a sole trader is great for a hobby that is making you some side cash! If your gross turnover is less than £1,000, you can qualify for a tax-free trading allowance. The trading allowance can also apply where you have expenses less than £1,000 so instead of claiming £500 in your actual expenses, for example, you can use the trading allowance instead.
The Cons Of Being A Sole Trader
1. No Limitation of Liability
Any debts to suppliers, staff or loans will need to be paid. If you don’t keep your cashflow in check, you can be held personally liable for the debts and can end up with a CCJ.
2. Can be harder to secure finance.
If you need to take out business loans, then your personal credit score is going to affect what you can borrow.
3. Can be less Tax Efficient
From a tax perspective, you and the Sole Trader business are seen as the same entity. Income tax, Class 2 NIC, Class 4 NIC all adds up!
4. VAT & Tax Bills
If you do not pay your HMRC bills on time, HMRC will chase and charge fines and penalties for any late returns and payments which will have to be paid out personally.
5. Some people prefer to work with a limited company
Limited Companies appear to be more established and professional compared to a Sole Trader which may go against you if you are compared to one of your competitors!
If you need any help with the setting up as a company, sole trader or limited company, feel free to reach out and we would be more than happy to help!
Frequently asked questions
This article has been provided for information purposes only. You should consult your own professional advisors for advice directly relating to your business or before taking action in relation to any of the provided content.
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