Business structures - sole trader or limited company?
When setting up in business there are a million things to organise and make decisions on and one of the key decisions you need to make is which business structure is the best one for you.
There are a number of different business structures you can choose from, including sole trader, limited company, partnership and LLP. As no two businesses are the same this can make it a confusing and often tricky decision to get right. We have examined some of the pros and cons of the two main structures below, being sole trader and limited company status.
This is the simplest form of business to start with. You run your business as an individual and get to keep the profits you make after income tax and class 2 and 4 National Insurance deductions. Although the official title is ‘sole trader’, you can still employ people. You are personally responsible for the costs of the business and any losses the business makes.
Sole trader pros
- It is straightforward to get started and easy to convert to a different structure later down the track.
- Losses made by the business can be offset against other income to reduce your personal tax charge, which is not possible with a limited company.
- It is often a good structure to choose whilst your business is growing and profits are low.
Sole trader cons
- You take on all the business risks and liability and so if the business fails, you personally will be liable to pay the business debts.
- Generally, for a sole trader with no other income, once your profits exceed approximately £15k per annum, your take home income will be higher if you run your business through a limited company.
- Depending on your business, your clients and customers may require or prefer to trade with a limited company because of their insurance requirements or because a company can appear more credible to them.
You could choose to run your business through a limited company, which is a separate legal entity from you as owner. The company is owned by its shareholders, of which there must be at least one. There must also be at least one director who does not have to be a shareholder (but often the directors will also be shareholders). Directors will be treated as employees of the company, although it is not a requirement for them to be paid a salary. The company pays corporation tax on its profits and you can extract income from the limited company via salary and dividends.
Limited company pros
- As above, once profits reach a certain level, significant tax savings can be made by running your business through a limited company.
- The liability of the shareholders is limited to the amount of the share capital issued and so offers protection to the shareholders' personal assets.
- A company can appear more credible and established than a sole trader and have better borrowing potential.
- Ownership is more flexible as share capital can be split into different proportions and types of share.
Limited company cons
- The company’s annual accounts and annual return have to be filed at Companies House and are publicly available.
- As a sole trader, you may well be able to complete and file your personal tax return yourself. If you run your business through a limited company, however, you will most likely need an accountant to help you to prepare the accounts and corporation tax return.
- Companies and Directors are subject to greater regulations and can be fined or found guilty of a criminal offence if they fail to comply.
- Losses made by the business can’t be offset against your other income to reduce your personal tax charge.
Which structure is the best one for me?
This depends on your individual circumstances and what is important to you and your business. If you’d like to have a chat with us about the best structure your business, please contact us. We’ll be happy to help and there won’t be any charge for our initial guidance.