Are you thinking of setting up your own business but unsure as to which set up would suit you best? Lets weigh up the sole trader vs limited company pros and cons.
All businesses no matter what the size must have a legal structure, both Sole Trader and Limited Company formations have advantages and disadvantages therefore the decision should be considered carefully taking all circumstances taken into account.
The definition of a Sole Trader as per HMRC ia s person who is the exclusive owner of the business, this entitles them to keep all profits after tax has been paid but it also means that they are personally liable for all losses the company may make. Being a sole trader comes with certain responsibilities, you will need to:
- Keep records of your business’s sales
- Send a self assessment tax return each year
- Pay Income tax on your profits along with Class 2 and Class 4 National Insurance
A Limited Company has a separate entity from the Directors and Shareholders who run it, the company has separate finances to their personal ones and it can keep any profits it makes after tax. Directors of Limited Companies also have responsibilities, these include:
- Following the rules of the company which are laid out in the articles of association.
- Keep company records and report any changes to HMRC or Companies House
- File the accounts and Company tax return within the time-frame stated by HMRC
- Pay Corporation tax
Sole Trader Vs Limited Companies Tax Differences
Sole traders are required to pay tax on the business profits; this is calculated by the self-assessment tax return which has to be filed by the 31st January each year.
Limited Companies tax is deducted from the Directors salaries via the Pay As You Earn System and is paid regularly to HMRC. It is a requirement for all Directors to complete a tax return. If they are also Shareholders then they may also receive Dividends from the company.
Limited Companies also have to pay Corporation tax on profits from doing business, investments or making chargeable gains. The amount of Corporation tax owed is worked out by compiling a Company tax return, this is usually due 12 months after the end of the company’s accounting period, the tax due must be paid 9 months and 1 day after the end of the accounting period.
If you would like further advice on this or another accountancy topic contact AJR & Co Ltd to arrange a free 30 minute consultation.