When it comes to setting up a new business, the first and probably most important thing to consider, is what should be your business structure. This normally equates to the question Sole Trader or Limited Company?

Both these types of structure have advantages and disadvantages, so I’ve outlined some of the key differences below, to help you decide.

Liability

A limited company is a separate legal identity, you are a shareholder and your liability is limited  to the amount unpaid on your shares (if any).

As a sole trader, you effectively are the business. Any business debts become your debts and your personal assets – including your house – are not protected.

Tax

In a limited company. You are an employee hence tax is deducted from directors salaries via the normal PAYE system. All directors must complete a tax return (unless you received absolutely no pay or benefits) that is irrespective of whether any tax is owed. Shareholders pay higher rate tax on dividends. Corporation tax is payable 9 months after the year end, by filing a company tax return.

Sole traders pay tax on their business profits, after expenses have been deducted. This is done via the self-assessment tax return system. The deadline for online tax returns is 31st January after the end of the tax year (31st Oct, if submitted in paper format).

National Insurance Contributions

Within a limited company, both employer’s and employee’s National Insurance (NI) is payable on directors earnings. This National Insurance charge is more than that paid by a sole traders, who pay Class 2 NI contributions of £2.80 per week, if your profits are £5,965 or more a year. Or  Class 4 contributions of  9% on profits between £8,060 and £43,000
2% on profits over £43,000 (rates as per 2016/17).

Company Profit and loss and the tax implications

For limited companies regardless of size, corporation tax is charged at 20%. For a sole trader, profits are taxed at 40% on taxable income in excess of £32,001 and 45% over £150,000 (rates accurate for 2016/17).

Accounting Requirements

A limited company must prepare annual statutory accounts from the companies records at the end of the financial year. These are to be filed with HMRC as part of your tax return as well as sent to all shareholders and Companies House. A limited company must also file an Annual Return to HMRC, which includes information about the directors, shareholders and registered office.

Sole traders aren’t legally required to have annual accounts to or file accounts for HMRC inspection. However, a record of business expenses and personal income are required for tax returns.

There is no one size fit all. So now, you’ve read my article, take time to consider which type of business structure suits you.

Goodluck