Published 14th August 2013
One of the first big decisions that you need to make when starting out on your path to creating a business is what type of company you should register as. In the UK at the moment you generally either register as a Limited Company or Sole Trader. This decision will have important implications for your future as a business so here are some things to consider.
###Advantages of a Limited Company
If you are a Sole Trader you will have to pay Income Tax and National Insurance on everything you earn. Once you start earning a decent amount you’ll be waving a lot more of your hard earned money away to the “tax man”. As a Limited Company you will pay 20% Corporation Tax and can then pay yourself through a combination of a low wage (to minimise PAYE and NI) and dividends. It may sound more complicated but it should result in more money in your pocket and less money going to HMRC.
If you are a Limited Company your business is a separate legal entity. This means if you go bust, you are not personally liable for the debt. The maximum you can lose is up to what you invested in the company in the first place. Although you need to be careful as you can be held personally accountable if you continue trading when your company is insolvent and this causes financial loss to creditors.
If you doing work for clients you will be seen as far more “employable” as any transactions are purely “business transactions” and you don’t have to mess about with PAYE or National Insurance. As Sole Traders are self-employed they don’t have this option.
Borrowing & Selling
As a Limited Company is its own legal entity, borrowing capital or selling your business will be completely separate from your own personal identity. Your company can have its own credit rating for example, and company assets belong to the company and not the individual. This keeps things much simpler and cleaner.
###Advantages of Sole Trader
While both Sole Traders and directors of Limited Companies are required by HMRC to submit a self-assessment, directors of a Limited Company must also submit extra paperwork for their company (Annual accounts, Corporation Tax return, VAT returns etc.). An accountant will take care of most of this for a Limited Company but Sole Traders will avoid most of this.
A Sole Trader will still have to submit a self-assessment but won’t have to prepare accounts for tax purposes. You only have to submit accounts to HMRC if you are subject to an investigation. Limited Companies need to file annual accounts to HMRC, which means accountancy costs can be higher.
Limited Companies must make certain information public, such as names of directors and shareholders. Anyone can request this information from Companies House. As a Sole Trader you don’t have to provide this information and can remain private.