There are a lot of factors to consider when you start your own business.  One of the biggest factors to consider is what structure should you use when setting up your business.  It’s a question we get asked a lot by start-up businesses – should I operate as a limited company or a sole trader?

Here’s some information to help you determine what the best option is for you.

Limited Company

Characteristics

• You and the business are separate legal entities
• The business is formally incorporated with Companies House
• The business pays corporation tax on its profits
• The business must file statutory accounts with Companies House
• Statutory registers must be kept at the registered office address
• Directors have legal duties and obligations to the business, namely fiduciary duties, such as to act in the business’s best interest

Practically what does this mean?  Pros and Cons

• Pro: As a separate legal entity, and because you have limited liability, you aren’t liable for the business’s debts – you’re only liable for what you put into the business
• Pro: Once incorporated no one else can use your business’s name
• Pro: Getting investment and financing is often easier for limited companies
• Pro: The company can claim Research and Development costs back from HMRC
• Pro: There can be tax efficiencies when operating as a limited company – we’ll come back to this one
• Sometimes a Con: Costs incurred must be in the business’s name
• Con: there’s more administration with the statutory obligations

What else?

• Operating as a limited company is often seen as being more professional
• Depending on your ambition for the business, it’s easier to sell a limited company than a Sole Trader business

The tax stuff

• Limited companies pay corporation tax on their profits
• You, as the owner and director, only pay tax on the money you’ve taken from the business
• You can take money from the business as salary – which is 100% tax deductible for the business
• You can also take dividends from the business – dividends are a distribution of profit, so no profit means no dividends can be taken
• Dividends are taxed at a lower rate than income tax, and aren’t subject to national insurance
• The business can contribute to a pension on your behalf, and it’s 100% tax deductible for the business
• As an employee of a limited company you can claim Employee Trivial Benefits; £50 for an item (not cash or a voucher) purchased for you by the business – this is capped at £300 for directors
• You can also spend £150 on a Christmas party as an employee of a limited company – there’s no tax implication for you, and the business can claim it back

Sole Trader

Characteristics

• There’s no legal separation between you and the business
• There’s no formal set up, making it quick and easy to get started – you just have to register as a Sole Trader with HMRC
• There’s no statutory obligations or filings with Companies House
• You do have to file a Self Assessment annually
• You’ll pay income tax and national insurance on the business’s profits

Practically what does this mean?  Pros and Cons

• Pro: there’s no statutory obligations, so less administration than a limited company
• Pro: you and the business can share costs, because you’re not separate legal entities
• Con: you’ll be taxed on the business’s profit, regardless of how much you take out of the business
• Con: it can be more difficult to get investment and financing as a Sole Trader
• Con: as there’s no separate legal entity, you’re personally liable for the business’s debts

The tax stuff

• You pay income tax and national insurance on the business’s profit, regardless of how much you take from the business
• How much you take from the business isn’t tax deductible
• The business can’t contribute to a pension for you, you must do that personally with money taken from the business
• You’re not an employee of the Sole Trader business, you are the business, so there aren’t any employee benefits

For Both Type of Business

• If you hit £85,000 of turnover in your business you must register for VAT – whether you’re a Sole Trader or a Limited Company
• Both types of business can voluntarily register for VAT
• Both types of business can employee people

Cost Comparison

As already mentioned, there are differences to the allowable tax-deductible costs for limited companies and sole traders – here’s a table detailing the biggest differences

Cost	Limited Company	Sole Trader
Working from home	Set amount per week dictated by HMRC	Can apportion an element of home costs (mortgage interest, council tax, light & heat etc) to the business
Mobile Phone	A business pays – 100% tax-free benefit for you personally	Apportion the percentage of business use to the business, the rest is yours
Car Costs	Claim 45p per mile from business as expenses*	Either mileage or percentage of car costs (insurance, fuel, servicing etc)
Home Internet	Must be in the business’s name	Can apportion the percentage of time it’s used for the business

*Typically, it’s not usually tax efficient for a limited company to own the car you use, as it creates quite a large benefit in kind that you’re personally taxed on. 

Are you a start up business?

Would you like to know more about business structures? Or work through the tax scenarios with some numbers? Get in touch CONTACT US