Sole Trader Or Limited Company? Nordens TV
Although the sole trader route, which is commonly referred to as being self employed, is the most popular way of running a business in the UK, there are significant advantages of operating as a limited company.
In this video, Mitch Hahn discusses the differences and benefits of being registered as sole trader or limited company.
Starting up as a sole trader is without doubt the simplest way to start a business in the UK. All you need to do is inform HMRC that you are working as ‘self employed’, and account for your business activities through the annual self assessment tax process. Setting up in business as a limited company involves a slightly more complex formation process, and the financial and administrative responsibilities of running a limited company are certainly greater than those of a sole trader.
There are pros and cons to both the self employed and the limited company routes. Which option is best for you depends on your own particular circumstances, so let’s look at some of the main advantages a limited company gives business owners over the self-employed route.
One of the biggest advantages for many is that running your business as a limited company can enable you to legitimately pay less personal tax than a sole trader.
Limited company profits are subject to UK Corporation Tax, which is currently set at 19%. If you are the director and shareholder of a limited company, you may choose to take a small salary and draw most of your income from the business in the form of dividends. By doing this, you can minimise the amount of National Insurance Contributions (NICs)you have to pay because limited company dividends are not subject to National insurance Contributions.
As a sole trader, your entire income is subject to NIC rules. Running your business as a limited company could therefore help you to take home more of your earnings. A sole trader and his/her business is treated as a single entity for tax and administrative purposes.
A limited company is a completely separate entity from its owners. Everything from the company bank account, to ownership of assets and involvement in tenders and contracts is purely company business and separate from the interests of the company’s shareholders.
Running your business as a limited company means you have the reassurance of ‘limited liability’. Assuming no fraud has taken place, your ‘limited liability’ means you will not be personally liable for any financial losses made by your business. A limited company can therefore give you added protection should things go wrong. - Those running a business as self employed do not enjoy such protection from financial claims. If things go wrong with a business operating as a sole trader (or partnership,) the owners are personally liable for all the debt and liabilities of the business.
In some businesses and industries, having a limited company can provide a more professional image. If you are doing business with larger companies, you may find that they prefer to deal only with limited companies rather than sole traders or partnerships.
Finding funding can be difficult for all types of new businesses. But because a limited company is a distinct entity from its owners it may be a little easier for a company to secure business finance than it is for their sole trader counterparts.
Once we register your company your company name is protected by law. No-one else can use the same name as you, or anything deemed to be too similar. As a sole trader, it’s possible someone else could trade under the same name as you, and you couldn’t do anything about it. This could damage your business, and in some cases, result in you having to go through the costly and time-consuming effort of changing the name of your business.
A limited company can issue various classes of shares. This means you can easily sell stakes in the company, or transfer ownership of shares. If your limited company has more than one shareholder you should 100% get a Shareholders’ Agreement which outlines your various duties and responsibilities. It can also be used to detail what shareholders can and cannot do with their shares. This will prove invaluable should a shareholder want to exit the business. Also, if a shareholder wishes to retire, sell his shareholding, or dies, it is far easier to transfer ownership of a limited company than a non-registered business structure.
I hope this simple video on some advantages of trading in a Limited company has been helpful. Of course everyone’s situation is different but if you would like to ask any questions or would like any assistance, please press the green button for a free consultation, or contact us on 02085300720 or email firstname.lastname@example.org
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