Get our expert advice on whether to incorporate your business
Get our expert advice on whether to incorporate your business
Should I use a Limited Company or be a Self Employed 'sole trader'?
Maybe you have a good business idea or maybe you have started a business?
One of the first things that need to be decided is how to structure the business: should it be set up as a sole trade or is it best to incorporate a limited company?
If you have already started a business, you may be considering when to incorporate the business into a limited company.
Your dedicated accountant at Sherwin Currid will help you understand the pros and cons of being a self employed sole trader, compared with trading through a limited company, so you can decide what is best for you. Please get in touch if you would like to find out more about how we can help support you.
What is a 'sole trade'?
Someone who is a sole trader is someone who is self employed and they are treated as the same single entity as their business. What this means that as a sole trade business owner you are responsible for any debts that the business incurs so you could lose your savings or even your home if things go badly.
On the other hand, being a sole trader is more flexible and easier to set up and run, compared with a limited company. Essentially all you need to do is to keep a record of your income and expenditure and then report that on a self-assessment tax return each year.
However, operating as a sole trader can result in you paying more tax than the limited company route. You may also find that some clients will not want to work with you as they prefer to deal with Limited Companies.
What is a Limited Company?
Unilike a sole trade, if you set up a limited company, then the business is a separate legal entity. This means that you, as a director of the company, have limited liability if things go wrong, something that can provide great comfort, as directors and shareholders cannot be pursued personally for company debts.
Limited companies pay corporation tax on profits that it makes unlike sole trades which pay income tax. The tax regime of limited companies can be more efficient that sole trades and it also offers greater flexibility for example allowing you to choose when you draw any profit out of the company.
Running a limited company can be more expensive and time consuming than running a sole trade. This is because there is a much greater amount of returns that need to be submitted. For example annual accounts need to be prepared and submitted each year.
Additionally there is much greater transparency over limited companies than sole trades. Much of the information relating to companies such as financial reports and owners details are in the public domain.
How to set up your business
If you have an existing sole trade that you want to convert into a limited company, we can advise you on how to incorporate a sole trade.
Sherwin Currid are experienced tax accountants, and will help you understand whether being a sole trade or limited company suits you best.
Setting up a sole trade
If you want to operate a sole trade then you can give your business a name although it is not a legal requirement to give your business a name.
If you are not already registered to complete self-assessment returns, then you will need to register for self-assessment with HMRC. There is further information on the requirements for setting up and running a sole trade in our Sole traders and Self Employment area.
Setting up a limited company
To set up a limited company, you will need to choose a suitable (and available) company name and then register it with Companies House. Our guidance on Setting up a Limited Company contains further information on this.
It is recommended to seek advice before setting up a limited company to ensure it is structured in the best and most tax efficient way. Sherwin Currid have many years’ experience in setting up limited companies and can help and support you through this process.
Is self employment or limited best for me?
The answer to the question whether you will be better off as a sole trader or a limited company is very much dependent on your personal circumstances, future plans and your preferences.
It is advisable to talk through such a decision with a professional adviser such as Sherwin Currid. Some aspects of the decision making such as the tax implications are complicated and need to be carefully evaluated.
The main elements that should be considered when deciding your best structure are:
One of the main advantages of a limited company is that as a separate legal entity it offers the Directors and Shareholders limited liability should something go wrong. This is not the case with a sole trade.
Administration and Paperwork
There is significantly less administration and paperwork involved in running a sole trade over a limited company. It can save you a considerable amount of time being a sole trader, especially in the early years whilst you are learning the ropes. Alternatively if you choose to pay an accountant to look after your business compliance then it will be cheaper for you to operate as a sole trade as opposed to a limited company.
Setting up your business
It is quicker and easier to set up a sole trade rather than a limited company because there are significantly less requirement to do this.
Ownership of your business
With a sole trade it is very simple in that you are the boss, you own the business and you make the decisions. With a limited company it can be more complicated because depending on how you structure your business there are more stakeholders and you may be answerable to other business partners and shareholders.
Sharing of the profits
With a sole trade this is again straightforward in that as the business owner you keep all of the profits. With a limited company the profits are distributed amongst the shareholders which can add complications depending on how you structure your business.
As a sole trader you will pay income tax on your profits, the amount of income tax you pay will depend not only on how much profit you make but also on what other income you have.
Limited companies pay corporation tax on profits made and then any profit after tax has been paid can be distributed to shareholders as dividend income which the shareholder will pay tax on. Directors that work for the company can also earn a salary from the company. Structured correctly the tax burden for a company owner can be significantly better than for a sole trader. Often the tax advantage of a limited company warrants a business being structured as a limited company but expert advice should be take to assess whether this is the case for you.
A sole trade has much greater privacy than a limited company. This is because many of the returns and records pertaining to a limited company such as ownership records and annual accounts are in the public domain and available for anyone to see.