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Sole trader or Limited company? Is there a right or wrong answer?

There’s hundreds of articles and blogs on what the best route to take is when setting up a new business, sole trader, partnerships or limited companies. I’ve decided to write a blog based on my opinion and to offer some advice, there is no right or wrong answer. It all depends on the individuals business.

Regardless of what industry a person is entering to start their business – they will need to become self employed. This involves ringing HMRC (Her Majesty’s Revenue and Customs). Once they have registered they will receive a UTR (unique tax reference number) and as a sole trader will begin making their own national insurance contributions; I believe monthly, quarterly and yearly are options to pay.

HMRC Business Rates

According to HMRC standard national insurance contributions are class 2 – which is £2.65 per week. Class 4 national insurance contributions are issued on profits over £7,605 at a rate of 9% up to £42,475 and 2% thereafter. The individual will also be required to pay their own tax contributions. They will be required to pay 20% tax on income from £10,600-£31,785 and 40% tax on the income generated after £31,785 and 45% on income over £150,000. The standard personal allowance for 2015 is £10,600 which is what a business can earn before being taxed.

As a limited company, things are not much different in regards to percentages. The corporation tax will be at a rate of 20% for earnings up to £300,000. Above £300,000 the company will still be paying 20% on earnings. This new rate was introduced recently. The intention of this is to reduce the cost to even less over the next couple of years.

These figures may or may not have changed since this blog has been released. I would always recommend talking to an accountant to get an up to date rate on national insurance contributions and what you should be paying as a sole trader. If you are going down the accountant route when you first start up, they can advise and help with this.

The differences between the two?

Being a sole trader; you are 100% responsible for everything to do with the business. You and the business are one, so if the business runs into trouble, your personal finances could also be involved. As a sole trader – it’s an easier set up with regards to accounting, less admin, less in accountant fees. You keep all your profits after tax and national insurance contributions. Depending on the business I’d normally recommend at least starting out as a sole trader. Especially if you initially predict a low income –  although there is no wrong or right answer.

Being a limited company you are separate from the company.  You are treated as a director and employee of the company, therefor the company is a different entity. Meaning if the business runs into trouble, it doesn’t affect your personal finances and you are more protected. Obviously if you haven’t made any personal guarantees against your assets that is. There is more administration involved, you will also need to register and legally submit annual returns to Companies House. Something else worth considering is withdrawing money from a limited company, this is not as easy as doing so with a sole trader. Taking money from the company needs to be formally recorded as a salary, dividend or loan.

When I established one of my limited companies I used a third party company to take care of the process. If you undertake a simple search on google, you will find numerous companies who will submit your application to Companies House on your behalf.

These companies also offer support, business accounts, accountants and more for a fee slightly higher than what it costs to register with Companies House. This process is much faster than using Companies House, normally taking no more than 3 hours! If you are impatient like me and want to see your business name on a certificate faster, I’d recommend using this option!

It is difficult to say which option is best, limited or sole trader. Both have their advantages and disadvantages.

Limited companies do have a more professional feel about them, since there is more of a process and registration in becoming a limited company and more transparency.

Some companies will not work with sole traders, but maybe this isn’t an issue depending on your business sector.

My appliance business never needed to work with anyone, which is one of the reasons why I kept it on a sole trading basis. The business had small outgoings, being a sole trader suited.

There is multiple accounting software programmes available on the market. If you familiarise yourself with these, they could help reduce the costs when submitting your corporation or sole traders tax and deductions. I regularly use accounting programmes to submit my income and outgoings. This acts as a great investment on time and money when handing over my tax return to my accountant.

Your business name.

Referring back to what we discussed earlier, your business name needs to be something which does not use your own name. As you want to create a brand which can expand. Being a sole trader, it isn’t required to necessarily register a business name. But ideally you want to be unique and not copy any one else’s name.

Being a limited company when registering with Companies house, you cannot register a business name which is already in use. Legal action could be taken against you under ‘passing off’ rules. Trademarking your business name prevents anybody copying it and allows you legal protection against anybody who registers the same name.

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