Setting up as a sole trader is without doubt the simplest way to start a business. All you need to do is inform HMRC that you are working as ‘self employed’, and account for your business activities through the annual self assessment tax process. Starting up in business as a limited company involves a more complex formation process, and the financial and administrative responsibilities of running a limited company are certainly greater than those of a sole trader. However, there are many benefits a limited company has over the self-employed route.
Here are 10 advantages you should bear in mind when deciding what business structure you should use for your venture;
The main advantage of running your business as a limited company is that you are likely to pay less personal tax than a sole trader.
Limited company profits are subject to Corporation Tax, which is currently set at 20%. The Government has stated it’s intention to cut Corporation Tax to 17% by 2020.
If you are the director and shareholder of a limited company, you may choose to take a small salary and draw most of your income in the form of dividends. By doing this you can minimise the amount of National Insurance Contributions (NICs) you have to pay because dividends are taxed separately, and are not subject to NICs.
As a sole trader, your entire income is subject to NIC rules. Running your business as a limited company could therefore help you to take home more of your earnings.
- Distinct Entity
A limited company is a completely separate entity from its owners. Everything from the company bank account, to ownership of assets and involvement in tenders and contracts is purely company business and separate from the interests of the company’s shareholders.
A sole trader and his/her business is treated as a single entity for tax and administrative purposes.
- Limited Liability
As the name suggests, if you run a limited company, you are protected in case things go wrong. Assuming no fraud has taken place, you will not be personally liable for any financial losses made by your limited company.
Those running a business as self employed do not enjoy such protection from financial claims if things go wrong with their business.
In some businesses and industries, having a limited company can provide a more professional image.
If you are doing business with larger companies, you may find that they prefer to deal only with limited companies rather than sole traders or partnerships.
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Finding funding can be difficult for all types of businesses in the current climate. But because a limited company is a distinct entity from its owners it may be a little easier for a company to secure business finance than it is for their sole trader counterparts.
Once you register your company with Companies House, your company name is protected by law. No-one else can use the same name as you, or anything deemed to be too similar.
As a sole trader, it’s possible someone else could trade under the same name as you, and you couldn’t do anything about it. This could damage your business, and in some cases, result in you having to go through the costly and time-consuming effort of changing the name of your business.
A limited company can issue various classes of shares. This means you can easily sell stakes in the company, or transfer ownership of shares.
If your limited company has more than one shareholder you should get a Shareholders’ Agreement.
Many people prefer to operate as sole traders rather than limited companies because the start-up and running costs are perceived to be significantly lower. However, you can form a limited company from as little as £15, so the price of setting up a company really is minimal.
Most accountants will charge a little more for preparing annual accounts for a limited company than they would for a sole trader. The differential varies so ask your accountant what both options would cost you.
A limited company can fund its employees’ executive pensions as a legitimate business expense. This can offer a tax advantage over those who are running their business as self-employed.
If a shareholder wishes to retire, sell his shareholding, or dies, it is far easier to transfer ownership of a limited company than a non-registered business structure.