When starting your own business as an individual, there is always an important decision to be made in relation to what structure you should pursue.
This typically is between registering as a Sole Trader or as a Limited Company.Here we will briefly touch upon the key differences between these two structures.
Registering as a Sole Trader
A sole trader is a self-employed person who fully owns their business.Becoming a sole trader is a quick and simple way to set up your business as there is no need to register with Companies House which means there are no registration fees/administration.
Most importantly, it entitles you (personally) to all of the post-tax profits received under your sole trade.However, registering as a sole trader also comes with risk.
Indeed, a sole trader is personally liable for any debts and losses the business has which can be a hazardous option for businesses which require large investments.
This means that your personal assets may be at risk should you be unfortunate enough for someone to make a claim against you or your business fails.
To set up as a sole trader you are required to register as self-employed with HMRC. Additionally, you need to register for Self-Assessment and file a tax return every year.
Responsibilities of a sole trader thus include:
Keeping records of your business ‘s sales and expenses
Sending a Self-Assessment tax return every year
Paying Income Tax on your profits
Registering as a Limited Company
Unlike a sole trader, incorporating a Limited Company will mean that you and your company are two separate legal entities.
Thanks to this characteristic, the owner(s) of the business will benefit from limited liability and may not required to sell his/her personal assets to pay debts in the unfortunate event that the company is sued, as long as they have acted within the law.
A limited company’s profits are subject to a 19% UK Corporation Tax (in 2017).
Moreover, operating your business as a limited company enables you to possibly remunerate yourself via a salary, dividends or a mix of the two to yield a slightly more tax efficient result.
However, unlike a sole trader, operating a Limited Company will generally require greater costs to set up such as registration costs and information relating to the owner of the company must be displayed on public record.
In addition, there are more complex accounting and administration requirements which will require the use of a professional accountant.
Acting as a sole trader or a Limited Company both has its advantages and disadvantages. Undoubtedly, deciding which one to opt for can be difficult.
If you would like more information or require advice about whether to act as a sole trader or a Limited Company, then please do not hesitate to contact one of our tax specialist at 020 8429 9245 or email us at [email protected].