It’s a common situation. You finally decide to go it alone and the sole trader business you setup is going from strength to strength. One day someone tells you that you should set up a limited company for your business but you’re not sure what that means for you.
I’ve outlined some of the key points below:
Sole trader or partnership
- There is much less paperwork – you will need to do a self-assessment tax return but other than that, the administration side is very minimal.
- You are taxed using personal tax rates on your profit (20% / 40% / 45% depending on your earnings) so you do not need to worry about dividends.
- You and the business are considered to be the same entity, so if the business were to go into administration, your personal assets could be used to pay off your creditors.
- You pay class 2 and class 4 national insurance on your profits.
- You will need to submit annual accounts to Companies House which will be published, where the general public can view them. They can also view who the directors are and other potential information you would want to keep private.
- You will need to set up a separate business bank account in the name of the business.
- The company is a separate legal entity to the sole trader, so liability will be limited to you as an individual if the company were to go into administration aside in specific cases under the “corporate veil” law.
- A limited company can be preferred by banks when you are looking to obtain finance. Sometimes large customers only want to deal with limited companies as well.
- Your company profits will be subject to Corporation Tax (currently 19%)
- Any income you personally want to take from the company is in the form of salaries (tax deductible for this business) or dividends (non-tax deductible).
- Your subsequent salary is tax at a rate of 20% / 40% / 45% depending on your earnings.
- Your subsequent dividend is taxed at a rate of 7.5% or 32.5% subsequent to earnings
- You will also be taxed from a National Insurance perspective as an employee, with the company potentially requiring to pay employers national insurance as well (depending on the salary size).
All of the above reflects key differences between sole trader businesses and limited companies. It’s not an exhaustive list and there may be other factors not on the list that you will need to consider when making the decision on how to setup your company. With this in mind, all users of the above information should seek tailored advice from a professional before deciding on the treatment of their business and tax affairs.
For more information on setting up a business, tax and accounting, please contact me via the following link.
ASU Accountants is based in Cranfield, Bedfordshire, UK. We embrace technology so don’t worry if we’re not local to you – we actively use Skype in our day to day business!