As the old saying goes “if we had a pound for every time we have been asked this question” and yet it can still be a difficult decision for some small businesses and startups, and as professional and renowned accountants in London, we always give the very best advice possible.
In this helpful blog, we will share the positives and negatives of registering as a sole trader or as a limited company, to enable you to make the best choice for your growing or start up business.
Where to begin
One of the most important decisions you’ll have to contend with is the structure and legal status your business will use moving forward, and our experienced accounting services are here to guide you, all the way through the process.
The structure you eventually choose has a long lasting impact on almost every aspect of your business, from the very important tax elements and how much tax becomes due, to the revenue you want to make, and if the worst case scenario should arise, what happens should your company get into difficulty.
It’s vital that you carefully weigh up all of the pros and cons of and make an informed decision, based on the solid professional advice from professional small business accountants.
Spot the difference
For most smaller businesses or self-employed tradespeople in the UK, registering as a sole trader can offer a few financial advantages, but this has to be weighed against the increased level of business risk.
When you are a sole trader, you are essentially a self-employed person. Sole tradership does not have a separate legal identity from your own personal identity. As a sole trader you take full liability for all matters regarding your business, including tax, profits and of course, losses.
If the decision is to be a sole trader it’s important that you register within three months of founding your business. Having an experienced firm of accountants in London, by your side during this process, will save a lot of time and money.
If your decision is to become a UK limited company, you can be protected from most business risks under the limited liability laws. This method does however require a lot more admin and legal requirements as well as sometimes guarantees from the directors.
A limited liability company has a unique company identity, which is registered on the formation of the company with Companies House. If the company has more than one owner or director, they will all be protected under limited liability, so that your own personal finances won’t be affected should the business struggle or end up in liquidation.
The use of professional and reliable accounting services significantly reduces the risk of that ever happening.
Key Aspects
As a limited company you must pay corporation tax, and although it sounds scary at first it can often be a far more tax efficient solution for businesses who will have high turnovers and potentially larger profits.
Sole traders are not subject to corporation tax, as you are simply required to pay income tax at the standard rate and to make National Insurance contributions on the total amount of profit your business makes.
Under the current 2022 rules these are set at Class 2 rate if your profits are £6,515 or more (for tax year 2021/22), and Class 4 if your profits are over £9,568 (for tax year 2021/22).
In terms of cash flow an advantage for Sole traders is that you keep all of your earnings after tax, which is paid via the self-assessment system. While there’s the potential for large profits, there’s also the risk that the business fails to obtain a high enough turnover for you to take a reasonable salary.
Other simple sole trader advantages are as mentioned, it is very easy to set up with much smaller amounts of paperwork, other than an annual Self Assessment tax return, having good small business accountants, will make this step very simple.
Another aspect to consider as a sole trader is that raising finance as a startup or in the future can be tricky, as banks and other investors tend to prefer limited companies.
Limited companies generally tend to attract investment more easily, and if that is a route you will pursue, then incorporation could be an advantage.. As a limited company, you are able to sell shares in your business to an investor, and your accountants in London can advise you.
As a limited company, where a competent set of small business accountants really save you money and time is when the tax return is due. There are significant amounts of paperwork , such as, a full set of accounts, a detailed confirmation statement, and a carefully prepared company tax return.
You don’t need those headaches and you run the risk of a fine, if it’s not correct.
The Wrap
Every business is very different and has its own unique set of requirements which you as the owner or as a director will set out.
When you talk to us as your preferred small business accountants, you get the very best experienced advice and we discuss and listen to your needs.
The decision whether to be a sole trader or register as a limited company is easy with professional accounting services providers.
Talk to us today.
