What are the advantages? Although being self employed or operating as a sole trader is the most popular way of running a business in the UK there could be significant advantages to operating as a limited company instead.
Setting yourself up as a sole trader is the simplest way to start a business – you only need to inform HMRC that you are self employed. Your business activities are accounted for through the annual self assessment for tax purposes.
Starting up in business as a limited company does involve a more complicated process but there are many benefits a limited company has over the self employed route.
Here are a few of the advantages that are worth considering when deciding which business structure to use:
Contracts: A limited company is deemed to be a separate person and can enter into its business contracts on its own behalf. If there is a problem with the contract it will be the limited company and not you personally who will bear the costs of putting it right (provided it does not fall into one of the exceptions which are personal guarantee, fraudulent trading and wrongful trading).
Expansion: In many ways it is easier to expand an incorporated business, the structure lends itself to equity investment which can be achieved in a variety of flexible methods.
Tax : You could pay less personal tax than a sole trader. Small businesses are taxed at the ‘small profits rate’ which is currently 20%. As a director and shareholder of a limited company you can choose to take a small salary and pay little or no PAYE or NIC and take your income in the form of dividends. Dividends are taxed separately and are not subject to NIC’s. As a sole trader your entire income is subject to PAYE and NIC, although you should always seek specific taxation advice from a reputable accountant.
Costs: Many people think that if they operate as a sole trader their costs will be smaller. Since the Companies Act 2006 smaller limited companies are exempt from many of the more cumbersome requirements of company law and therefore the increase in costs may be less than people anticipate.
Our Commercial team, based in Christchurch, also cover Bournemouth, Poole and the New Forest. For a free initial chat, please call 01202 499255 and Matthew or a member of the team will be happy to discuss any questions that you may have.