Limited Company or Sole Trader?

Have you considered what is the best structure for your business?

Gregory Accounting, small business accountants in West Lothian advise that this is an important decision to make.

One of the decisions you are faced with when starting a new company is whether to run your business as a sole trader or a limited company. The majority of small business in the UK are sole traders. The reason for this is because it is very simple to run. All you need to do is register as self-employed with HMRC and file your tax returns. So why would you want to run your business as a limited company? There are three main reasons – to protect your personal assets, to reduce your tax bill or because of the trading advantages it may give you. But there are also extra responsibilities, obligations and costs that come with a limited company.
Operating as a limited company allows you to some protection of your personal assets should anything go wrong with your business. As a sole trader, if you cannot repay your business debts, pay your tax bill or have cash flow difficulties then your creditors can go after your personal assets, such as your house or savings. With a limited company your business is separate from you as a person. Creditors can only go after the assets in your business.
Depending on your clientele, your business may have more credibility if it is a limited company. Furthermore, some clients will only trade with companies. On the other, if you are a contractor, some companies will not pay contractors through limited companies.
The often quoted reason for setting up a limited company is to reduce tax bills. This is because when you are a sole trader you are taxed on all of your earnings after business expense have been deducted. With a limited company you pay yourself a salary as an employee of the company. There is additional tax relief that are available to employees such as child care vouchers. The company pays tax on the profits left in the business, after the salary has been deducted. Shareholders can be paid a dividend out of the remaining pot after tax has been paid. Depending on your business finances this can result in a lower tax bill. If you are a contractor working for one client at a time though you need to check if you are IR35 compliant as the tax advantages are lower if you aren’t.
The downside to setting up a limited company is that you have additional responsibilities as a director of a company and your insurance obligations increase. You will need to file annual accounts with companies house, run a payroll system, file returns with HMRC and file company tax returns. This means either extra work for you or higher fees paid to your accountant.
That said the advantages to running your business as a limited company will often more than outweigh the disadvantages. Ask your accountant today to advise what the best structure is for you. We offer this advice free with all of our fixed fee packages.


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