Once you are in business you must decide the best structure for your enterprise. The most suitable structure for you may be different to someone else and will depend on your personal situation. The decision you make will have a bearing on the way you and your business is taxed.
A Sole Trader or Partnership are the simplest ways of trading
- There are fewer formalities however you are still required to prepare accounts each year (accountancy fees tend to be lower).
- Your business is not distinguished from your personal affairs, so you will be legally liable for any debts of the business.
- Business accounts are not required to be submitted to Companies House.
- You pay income tax and national insurance based on your business accounts.
- Your self assessment tax returns which are due by January 31st each year, record all your income over the previous tax year with any taxes due spread over two payments each year in January and July.
A Limited Company is a separate legal entity from its owners
- Through the purchase of shares, a shareholder is recognised as having ownership in the company.
- A major advantage of owning a limited company is that your personal liability is limited to the nominal share capital you have invested.
- Should you wish to extract money from the company, you must either pay yourself a dividend as an owner, or a salary as an employee. The advantage to you is that through a combination of these two you can minimise your overall tax and national insurance liability.
- Companies pay corporation tax on their profits.
- You as the director/shareholder are required to file annual self assessment tax returns from which your personal taxes will be based.
- It may be easier to raise finance as a limited company.
- There are additional administrative factors in running a company, such as statutory accounts preparation, company secretarial obligations and PAYE procedures.
- In general if business profits are or are expected to be greater than £25,000, most business owners prefer trading within a limited company. Mainly due to the tax saving advantages.
There may be other more complex situations to consider. Please ask if you need further advice.
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