Sole Trader Or Limited Company?
One of the first things you need to decide when starting a small business is the structure it will take – Sole trader or limited company?
The decision can depend on a number of factors:
- How much are you planning to grow your business?
- What are your yearly earnings goals?
- Will you have partners or employees?
You’ll need to work out what business structure will be financially beneficial to you and your fledging business.
Here’s a brief look at the differences between running your small business in Leicester as a sole trader or limited company.
A sole trader basically means you are self employed. This option is the most popular for contractors, freelancers and small business owners when they are first starting out, primarily because it’s less hassle. Apart from basic book keeping and yearly self assessments, there’s not much else to do.
However, once you start earning over £25,000 a year, the tax implications become more complex. And once you go over £85,000 a year, you’ll have to register for VAT.
The most important thing to consider as a sole trader is that HRMC sees you and your company as a single entity even if you are ‘trading as’. This means that you are personally responsible for any debts, taxes and legal disputes incurred by your business.
You’ll also be subject to ‘provisional tax’. These are twice yearly advance tax payments based on your likely earnings for the next tax year.
A limited company is a popular way to structure a business..
Once you set up a limited company, you’ll become its director. HRMC will regard you and your business as two separate entities. This can have big advantages. Your company, not you personally, is responsible for any of your business debts and disputes.
As a limited company, you’ll be subject to corporation tax, but, depending on how much your business earns, this can be more advantageous than paying taxes as a sole trader.
The benefits of a company pension scheme are also more generous than a personal pension plan.
Also, there are tax benefits and incentives for limited companies that aren’t available for sole traders.