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If you ’ re among them , then one early decision you ’ ll need to make is whether to become a sole trader or set up a limited company . There ’ s certainly no one-size-fits-all answer , because each carries its own advantages and disadvantages . If you ’ re wondering which way to jump , this might help you decide :
Advantages of being sole trader Firstly , there are fewer admin costs to being a sole trader . In a nutshell , it is cheaper and easier . Contracts with clients just have to be in the individual ’ s name , not the company name and accounting is more straightforward .
Secondly , if the cost of a car is to be put through the business , sole trader status is more flexible . This is because here , the car cost carries no benefit in kind . Generally , tax which is incurred for putting a car through a limited company will be higher . However , there is an exception ; if you have an electric car through a limited company this will be cheaper .
Finally , financial information does not need to be made public . If you ’ re a sole trader , there is no requirement to register with Companies House and submit annual accounts , that anyone can view . This may or may not be important to you . You may want to keep your financial information confidential , or you may be happy for public scrutiny . It is something to consider .
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taxable profits will pay 25 % Corporation Tax .
Secondly , there is less risk in a limited company . If you have customers who don ’ t pay , and you can ’ t then pay your suppliers , then it is your limited company which is liable , not you personally . The company may go into administration , but your personal assets should be unaffected .
By contrast , as a sole trader , if you fall into debt with suppliers and court action ensues , you are personally liable . If yours is a business that doesn ’ t have lines of credit , you have minimal risk . If , however , you have creditors – for example , you are a builder and need income to pay for your building material suppliers and sub-contractors – then the risk is higher .
Thirdly , perception may be a consideration . Depending on your type of business , there may be an advantage to running a limited company , in terms of how you are regarded by others . Some businesses may not want to deal with a sole trader , or they may assume you are too small .
Equally , you may have a limited company which has minimal turnover – and we deal with limited companies whose turnover is as low as £ 9,000 – but the assumption is that they are larger , and this might open doors to new clients . Whether or not this factor is an advantage , really depends on how you want to position yourself .
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Finally , you might want to consider access to tax credits . Some tax credits , such as R & D , are only available for limited companies . This is an area well worth exploring if you are planning to invest , because R & D covers a wide area . Among our clients are IT specialists who have created new software , and another making new-to-market tools .
Similarly , the Super Deduction Scheme for investing in qualifying new plant and machinery assets is only available to companies . This scheme , introduced by Rishi Sunak during the pandemic , comes to close on 31 March 2023 .
At Optimum , when we work with clients , we talk through all the options and help them decide the best business model to suit their particular circumstances . If you are setting up in business , please get in touch with me , Michael Blaken , Accounts Director at Optimum
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If you run a business and would like to speak to proactive accountants who will help you to grow your business , please get in touch with Accounts Director Michael Blaken . Email mblaken @ optps . co . uk , visit www . optps . co . uk or call 01793 538 198 . |
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Advantages of being a limited company director As a limited company director , you are more in control of your taxes . When you are a sole trader , you are taxed on the profits you make regardless of whether you spend the money or not , outside the business . If you make £ 100,000 profit , but only spend £ 25,000 with the rest sitting in a savings account , you are still taxed on £ 100,000 . In this example , this pushes you easily into the higher rate tax bracket , and ( if you ’ re a parent ) you ’ ll no longer be able to take advantage of child benefit .
The situation is very different if you run a limited company . Here , you are taxed personally only on the dividend or salary you draw . In our example , if you make £ 100,000 profit you only pay 19 % Corporation Tax and personally pay tax on the £ 25,000 you take out of the business . These rates are going up from 1 April 2023 and the percentage charged will be based on the level of profits . A company making more than £ 250,000 in
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THE BUSINESS EXCHANGE 2023 13 |