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.
Matthew Fretten, Commercial Partner, says “Starting up in business as a limited company involves a more complicated process. However, there are many benefits a limited company as a business structure.”
What are the advantages of being a limited company?
A limited company is deemed to be a separate entity from the person running it. The company can enter into business contracts on its own behalf. If there is a problem with the contract it will be the limited company, not you personally, who will bear the costs of putting it right. There are exceptions of course.
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.
A person running a limited company 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 (Pay as you earn income tax) or National Insurance contributions (NIC). Instead, you 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. It is imperative to seek specific taxation advice from a reputable accountant.
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. Therefore the increase in costs may be less than people anticipate.
Matthew concludes “There is a lot to consider and the best advice is to seek advice from a specialist lawyer, in conjunction with a duly qualified accountant, who can help you weigh up the pro’s and con’s for your particular circumstances.”
Our Commercial Team is happy to discuss any issues that this raises for your own business. If you have any questions, you only have to ask us at Frettens. Please call 01202 499255 and Matthew or a member of the team will be happy to chat about your situation and your particular requirements.