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Sole Trader vs Limited Company | A Construction Comparison

Sole Trader vs Limited Company | A Construction Comparison

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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:

1. Are you going to be going for any business funding?

2.  Is the nature of your business quite risky?  

3. If something goes wrong, could you potentially be sued?  

4. Are you looking to be VAT registered?  

5. How much other income do you have?  

6. 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!

This article was written for Saint Financial Group, a multidisciplinary group based in the UK that helps construction businesses develop and grow. SaintFG offers a range of quality solutions in supporting businesses.

Saint provides the luxury of free business consultancy for of our clients, call now for your free consultation with a friendly business advisor to discuss your burning questions and put that energy back into your business!

SaintFG

Written by:

Dylan O'Rourke MAAT

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