One of the most common questions asked by the self-employed is whether to trade as a company or as an individual. The decision has implications for tax, legal and financial responsibilities. There is no straightforward answer, because different legal structures suit different situations.
The differences between Sole Trader and a Limited Company
Each structure has advantages and disadvantages which are outlined below to help you choose the best option for your circumstances.
Liability
In a limited company, the liability of members or subscribers of the company is limited to what they have invested or guaranteed to the company.
As a sole trader, the owner carries the financial responsibility for all debts and/or losses suffered by the business, to the extent of using personal or other assets, to discharge any outstanding liabilities.
Tax
The company pays corporation tax on its taxable profits by filing a company tax return within 9 months of the year end. Any dividends voted to shareholders are subject to income tax.
Sole traders pay class 2 and 4 National insurance and income tax on their taxable profits.
Profit and loss
For limited company’s corporation tax is currently charged at 20% regardless of size. Any profits made can be carried forward in the form of reserves or can be offset against the future or previous losses to reduce the company tax bill.
For sole traders, profits can be taxed at up to 45%. Any losses incurred can be set off against other income in the same tax year, carried back to previous years or carried forward.
Filing accounts
A limited company must file annual accounts at the end of the financial year to HMRC. A confirmation statement also needs to be sent detailing information about the directors, shareholders and persons with significant control.
As sole trader, your accounts are not submitted to HMRC and any income tax is paid through a self-assessment tax return sent to HMRC.
Summary
Choosing between a sole trader or limited company involves many tax and non-tax issues. Every business is different and a one size fits all approach is not suitable. We can assist you to make the right choice. Please get in touch with us. For more information or advice, please Contact Us.
By Ejaaz Qureshi