BUSINESS STARTUPS: SOLE TRADER OR LIMITED COMPANY?
One of the most common questions that clients ask me is: "Should I run my business as a sole trader [individual] or a limited company?" Indeed, this is one of the first decisions you should make before you start trading.
WHY BE A SOLE TRADER?
- It is simpler to set up and run. You need to let HMRC know you are in business, and then file one personal tax return with them each year.
- You can use your losses to save tax: If you make a loss in your first few years, you can set this loss against other current/past income to save tax.
- It's easy to take money out of the business. You ARE the business. Therefore, you can pay yourself from your business bank account without a problem.
- There is higher risk of losing your home & other personal possessions. As mentioned above, you ARE the business. Therefore, if your business is sued, you are sued. You are at risk of losing your home and other personal assets.
WHY SET UP A LIMITED COMPANY?
- There is less risk of losing your personal belongings. You and the business are separate legal entities. So if the company is sued, your personal assets are safe.
- It is more tax efficient: You normally pay less tax through a limited company, especially when your business profits are growing.
It is more complicated to set up and run. You need to let both HMRC and Companies House know that you have set up your company. Also, each year you must file at least 4 different documents:
A set of company accounts (these are kept on public record)
An annual return (this is also kept on public record)
A company tax return
A personal tax return for each director
- It is more difficult to take money out of the business. You and the business are separate legal entities, and so there are restrictions on how you can take money out of the company without paying more tax
So there are pros and cons to both. It is not a black and white decision. It depends on you, the potential growth of your business, and other factors. If you need advice on whether to be a sole trader or limited company, just contact us for a free consultation: http://www.ejpandco.co.uk/contactus/