Why be a Sole Trader?
Sole Trader remains the most popular type of business in the UK, accounting for 59% of all businesses in the UK in 2020. Why?
- It is easy to set up. A simple registration with HMRC and off you go.
- Administration is less onerous (and often cheaper). For example, accounts do not have to be in strict Company Law format.
So why become a limited company?
Firstly, let’s dispel the popular opinion that becoming a limited company will save you tax. This may be the case, and it may not. I will come back to this. Then why become a limited company?
- The biggest advantage is the limited liability status. The company is a separate entity to you. As a sole trader, if your business runs into financial difficulty then your personal finances and assets are at risk.
- A company places a barrier between you and your business, giving you greater protection if the business gets into trouble.
- In a legal dispute you will not be personally sued, as you could be as a sole trader.
- It is a matter of perception. A limited company gives the impression of safety and security. Banks, other businesses, contractors, and clients are more likely to work with a limited company than a sole trader.
- It gives the impression (even if it can be a false one) of being a more professional outfit.
Tax
The tax differences between sole trader and limited company are vast.
Sole Traders pay income tax, class 2 and class 4 national insurance on the profit of the business. Tax returns must be filed by 31st January after the end of the tax year and is payable by the same date.
Limited companies pay corporation tax on its profit, due 9 months after the end of the company’s financial year end.
Up to 2016 there was a big tax difference between the two. Nine times out of 10 a limited company would be the best option for tax and could save you quite substantial sums.
In 2016 the taxation of dividends was changed, and the gap narrowed considerably.
Now it is often a very close call.
Which option is best?
To give a typical accountant’s answer – it all depends. And that’s why speaking to an accountant is important.
Do not set up a limited company purely based on the assumption that you will pay less tax. In some circumstances you may pay more.
There are advantages and disadvantages to both structures. And, as with all business decisions, tax is only one consideration.
Whether you are starting out or growing your business, book a complimentary call with me, and we can discuss the options and help choose to be a sole trader or limited company.
John Lawrence FCA
Guida Accountancy