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Sole Trader v Limited Company

There are vital differences between sole traders and limited companies, and what’s right for one enterprise isn’t always the best fit for another. Let’s take a look at the key differences between operating as a sole trader and a limited company…

Protect yourself from company debt

Limited companies are separate entities to their shareholders and directors. This means company directors are not normally personally liable for any debts of their companies, known as the veil of incorporation. Sole traders are personally liable for debts accrued through their operations. One of the main advantages of becoming a limited company is that it can appear vastly more professional, which can help you win lucrative contracts and impress a wider range of clients and customers. You may also be able to save a substantial sum of money by registering as a limited company due to tax savings.

Paperwork demands and tax

When you are a sole trader, there isn’t a great distinction between yourself and the business that you are running. Your house is not protected if your business falls into debt, and the business debts are your debts. However, limited companies face bigger challenges and more paperwork when it comes to tax and accountancy. The dividend allowance for shareholders was introduced in 2016, with the first £2,000 being tax-free. If you are a director, you will need to complete a tax return unless you receive no pay or benefits whatsoever, even if you owe no tax. Corporation Tax for limited companies is now currently charged at 19%.

Sole traders and tax

Sole traders also need to pay tax on their profits through self-assessment, though they do pay less National Insurance. They also pay 20% on up to £34,500 above the personal allowance threshold, 40% on income between £34,501 and £150,000 and 45% on income over £150,000 in England, Wales and Northern Ireland.

Can one person become a limited company?

It’s perfectly fine to operate as a limited company even if you are the only person involved in the business. The assets and liabilities of your company will be totally separate from your personal finances. As a limited company, you will need to make a number of annual returns and file accounts annually with HMRC and Companies House. You can pay yourself a salary and be remunerated with dividends from your profits.

Pros and cons of becoming a limited company

Some key advantages of being a limited company include being able to protect your personal assets, potentially minimising the tax on your earnings and National Insurance and being able to claim a wider range of business expenses. The expenses will be deducted from your company profit and go untaxed. You may also find it easier to borrow money as you won’t need to build up a high personal credit score to gain access to funds. Furthermore, many big-name corporations rarely work with sole traders and always opt to work with limited companies whenever possible. However, sole traders can benefit from reduced paperwork, more financial privacy and simpler accounts.

Talk to Perrigo Consultants

For further advice on whether going limited is right for you, give us a call on 01299 488860, send us an e-mail to enquiries@perrigoconsultants.co.uk or use the form on the website.