What is the difference between a sole trader and a limited company?

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Greetings! I have got a question concerning how to start a business. I am trying to start trading, but I would like to know whether I should set up as a sole trader or a limited company. Could you please advise of the differences between the two? Thanks, M

Answers

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There are benefits to both of these business structures, so it essentially boils down to personal preference.

A sole trader is someone who sets up a business on their own as a self-employed individual. To do so, you must:

  • Register for Self-Assessment with HMRC.
  • Keep a hold of your business and accounting records.
  • Report your annual income on a Self-Assessment tax return.
  • Pay Income Tax and National Insurance Contributions on your business profits.
  • Assume full responsibility for all business debts and liabilities.

A limited company exists a separate legal entity from the people who own it. This means that the company itself must assume full responsibility for business debts and liabilities. The owners are only liable for what they invest or guarantee to the company. This benefit does result in stricter compliance and more complex reporting requirements.

You can set up a company on your own or with other people. To do so, you must:

  • Incorporate your business as a limited company at Companies House.
  • Register the company for Corporation Tax.
  • Register as an employer (you must do this even if the director (you) is the only person working for the company).
  • Register yourself for Self-Assessment.
  • Report your annual income on a Self-Assessment tax return.
  • Pay Income Tax and National Insurance on the personal income you receive through the company.
  • Pay 20% Corporation Tax on all profits.
  • Prepare a Company Tax Return and full accounts for HMRC each year.
  • File annual accounts and an annual return with Companies House every year.
  • Report changes to Companies House within a certain timeframe
  • Maintain a number of business and accounting records, all of which must be made available for public inspection.
  • Disclose details about the business and its directors and owners on public record.

As a general rule, if your business is really small, you do not carry out high-risk business activities and your annual income is likely to be less than £20,000, the sole trader structure will be perfectly suitable for you. Otherwise, you should seriously consider setting up a limited company because you will be able to protect your personal assets and save a great deal on tax. Speak to an accountant or professional business advisor for expert guidance.

a year ago
 

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