Sole Trader vs Limited Company: Which one is better?
Not sure if a limited company is the best setup for your company?
The decision to setup your company as a sole trader business vs a limited company can be challenging as there are a lot of factors that would influence your decision. There are advantages and disadvantages for both and every business would need to consider factors that are relevant in their scenario to be able to make the best decision for them.
Let’s first look at the advantages of setting your company up as a limited company or in other words, a limited liability company in the UK,
Your company would be treated as a separate legal entity in the eyes of law which would mean that if there is a business loan taken by your company, your private assets are not sold or seized to pay off the business loan.
For companies with less than £50000 of taxable profits, the corporation tax rate is 19% which is lower than 20% rate that you would pay as a sole trader business owner on your profits.
A limited company gets more tax reliefs than sole trader businesses on their expenses for example, they can claim for research and development expenditure relief when they spend money on projects that tries to expand the knowledge in the field of science or technology.
Now, let’s consider some of the advantages of setting up your company as a sole trader business,
There is less administration burden for sole trader business as there is no need to submit annual accounts to Companies House for example.
There is also more privacy for the owner and the business as their details are not published on the Companies House where anyone can access those.
When you withdraw money from the business, you do not pay tax on that money as the business gets charged tax on the overall profits once only. With a limited company, you pay tax on the taxable profit which you can extract as dividends but then there are dividend tax on those so essentially you are paying tax on the money twice.
How to make the decision?
With all of these factors in mind and by understanding the advantages and disadvantages, you can make the decision between the two. You would need to plan your tax affairs efficiently so that you can minimise the impact of any disadvantage that you would normally have under a particular structure.
I hope this blog post has helped you understand the key differences between the two types of company setup in the UK which are common. Of course, there are other setups as well such as partnership and limited liability partnership which you could also consider. At Finest Accountancy, we are here to help you with the tax planning and we can also help you with the company setup decision by understanding your own individual circumstances. Thank you for reading.