Limited Company VS Sole Trader
If you’re thinking about starting up a business and don’t know which legal set-up to undertake, then there are a number of important factors to consider. Unless you’re absolutely sure of what you’re doing, then a variety of complications could hinder your business depending on whether you’ve registered yourself correctly. Let’s take a look at some of the benefits of setting up your business as a limited company or as a sole trader.
Sole Trader Benefits
Many business begin life by losing money, and it can a while before any profit is recorded. As a sole trader, you are able to offset your trading losses against any previous employment income, if you leave a high-paid job to become self-employed. Furthermore, losses can also be offset against alternative sources of income too, including dividends, renal income or savings interest. In comparison, the losses of limited companies cannot be offset against personal income.
Sole traders also pay a lower percentage of capital gains tax. If you’ve created a business that you’re looking to predominantly invest into, with little or low regular income but a hefty return when you sell in the future, then you will pay a lot less tax. In comparison, if the assets are held in a limited company, you will be subjected to a significantly higher tax rate.
Furthermore, limited companies have to submit annual statutory accounts and have to comply with the Companies Act. The fees to process these payments can be quite expensive, however sole traders would not have to comply with any of these regulations.
There’s also minimal hassle if you decide to give up on your business as a sole trader – you simply stop trading and inform the necessary HMRC departments. As a limited company however, you would have to undergo HMRC investigation and you’ll probably get struck off.
Finally, as a sole trader, the information you provide the HMRC will only be seen by the HMRC. In comparison, limited companies are required to file accounts with Companies House, files that the public can access. Even if you’re a small limited company, there is still a public record of your business and trading finances.
Limited Company Benefits
Setting yourself up as a limited company also has its benefits. Limited companies are subjected to corporation tax, which is typically at a lower rate than personal sole trader income tax rates. Therefore, if you own a limited company and you have no need to withdraw any of the profits from the business accounts, then the set-up of the business is certainly superior to that of a sole trader. However, when it comes to withdrawing funds from a limited company, these funds may be taxed.
Furthermore, as a limited company, your business and personal funds are kept completely separate, meaning that if your business goes under, you or your personal finances won’t be held responsible. For example, if your limited company cannot afford to pay all its debts, then you will not be liable for those debts. Additionally, setting yourself up as a limited company provides an extra sense of credibility for other people looking to invest.
If you would like more information on financial assistance and advice, visit Brookson to look online for contractor accountants.