Sole Trader and Limited Company, what’s the best for you?
One of the most commonly asked question among new business owners…
What is a Limited Company?
A limited company is a separate legal entity that you can form to run your business – even if you’re a one-person business. As a director, you’re responsible for any legal and financial decisions the company makes. The company’s assets and liabilities are completely separate from your own personal finances.
If you decide to set up your own limited company, you’ll be a director and a shareholder of the business. You can be paid a salary and/or dividends from the company’s available profits. The company must make various annual returns and file annual accounts with statutory bodies such as Companies House and HMRC. There are also several deadlines and responsibilities.
What about Sole Trader?
If you’re a sole trader, you run your own business as an individual and are self-employed. You can keep all your business’ profits after you’ve paid tax on them. You’re personally responsible for any losses your business makes.
Advantages of running a Limited Company
Limited liability
As the company is a separate legal entity, your personal assets are protected. If your company needs to close or experiences financial difficulties, your personal assets cannot be taken from you to pay company debts.
Minimising PAYE Tax and NIC
As a sole trader, all of the profits made by your business are taken as income. You’ll pay income tax and National Insurance Contributions (NIC) based on government thresholds.
Through operating as a limited company, you’ll pay Corporation Tax (currently at 19%) on your company profits, and can pay yourself through a combination of dividends and salary. This will minimise your PAYE (tax you pay on your earnings throughout the year) and NIC outgoings.
Borrowing power
As a sole trader, you rely on your personal credit rating to borrow capital used to grow your business. A limited company can establish its own credit rating, which can support borrowing to invest in the business.
Advantages of staying Sole Trader
Less paperwork
Both sole traders and directors of limited companies are required to submit a personal Self-Assessment to HMRC, but those operating a limited company must also submit extra paperwork to regulatory authorities (Corporation Tax, Annual Accounts, VAT returns if VAT registered). Failure to submit returns on time usually results in significant penalties. As a sole trader, you’ll avoid the headache of these returns.
Privacy
Limited companies must share certain information with the public, such as filing annual accounts and stating the names of directors and shareholders on public registers at Companies House. As a sole trader, you don’t have to provide this information to Companies House.
Four simple steps to set up your limited company
1. Choose your type of limited company
The two main choices are:
Private Limited Companies (LTDs)
Public Limited Companies (PLCs)
Most freelancers, contractors, start-ups and small businesses will opt for a Private Limited Company, as PLCs must have a minimum share capital of £50,000, at least two shareholders, two directors and a qualified company secretary.
2. Choose a name
Like a website, your company your company name has to be completely unique. You can differentiate in a few ways to guarantee a unique name for example using either “Limited” or “LTD”. You can find available company names using the Companies House WebCheck service.
3. Enter your company information
When you register a new company (UK), much of the information you provide will be made publically available. Companies House will want details of your:
Company directors – your company must have at least one director. Companies House will want to know their name, date of birth and residential address.
Company shareholders – every company must have at least one shareholder, but this can be the same person as the director. Companies House will want to know their name, date of birth and residential address.
Registered office – this is the address where Companies House and HMRC will send mail. It must be in the UK and it must be possible to reach the company directors at the address.
4. Complete the incorporation process
Companies House is responsible for all limited company registration in the UK. The following documents must be completed and returned to Companies House in order to complete the incorporation process:
Memorandum of Association – limited company name, location, business type
Form 10 – director’s names, addresses and registered limited company address
Form 12 – states the limited company complies with terms and conditions of the Companies Act
Articles of Association – outlines director’s powers, shareholder rights etc.
That’s it! Your company is then set up!