Sole trader or limited company, which trading style is best for me?

You may have heard that you can save tax by running your business through a limited company, but is that really the case?

There is no one correct answer as there are many factors to consider before deciding on the most beneficial trading style to suit your individual circumstances, but here a few of the main differences.

 Sole Trader/PartnershipLimited Company
BusinessYou and the business are one and the sameA separate legal entity
TaxYou pay income tax, Class 2 and Class 4 National InsurancePays Corporation Tax
Withdrawing moneyCan withdraw money at any time with no tax implicationsWithdrawn by way of salary or dividend with personal income tax and National Insurance to pay
LossesCan be offset against profits or against other income sourcesCan be offset against profits of the same company only
Business failureYou are personally liable for any debtsLiability is limited but you could be personally liable if you have not acted in the best interests of the company, or have given any personal guarantees on borrowings
AccountsSimple accounts that do not need to be submitted to anyoneFull statutory accounts to be submitted to HMRC and abridged accounts to be submitted to Companies House
Tax returnsAnnual personal tax return and partnership return if applicableAnnual Corporation Tax return and generally personal tax returns for office holders and shareholders
Additional annual requirementsNoneCompanies House Confirmation Statement to be submitted annually along with a fee payable
Additional regular requirementsVAT returns to HMRC if applicableVAT returns to HMRC if applicable If salaries are to be paid, running payroll and making regular submissions and PAYE payments to HMRC

The decision on which is the best trading style for you will depend on your personal circumstances. Please contact us for more information and to discuss the various options available.

What is a limited company?

A limited company is a completely separate legal entity from the directors or shareholders.

As a director you work for the company as an officer. This is similar to being an employee but is not the same. A director is not classed as an employee in employment law or when looking at the National Minimum Wage.

The company pays its own Corporation Tax on profits earned.

Any company losses can only be offset against company profits.

The directors may be paid a salary and shareholders may receive dividends. They will then pay personal tax and possibly Class 1 National Insurance on this income.

You can borrow money from the company but there will be tax implications for the company if it is not repaid within 9 months of the year end, and if no interest is charged then the director will also have additional tax to pay.

If the business fails, your liability is limited unless you have not acted in the best interests of the company, in which case you could be personally liable for any debts. Additionally, if you continued to trade when you knew, or should have known, that the company was insolvent then you could be held personally liable.

The company must prepare annual accounts in accordance with the Companies Act and the relevant accounting standards. A full set must be submitted to HMRC and an abridged version must be submitted to Companies House and will be placed on the public record for anyone to view.

What is a sole trader/partnership?

You and the business are one and the same.

You pay tax on the business profits, not on what you withdraw from the business.

Any losses can be offset against business profits, or against income from other sources in the year of the loss.

You pay Class 2 and Class 4 National Insurance on profits above Government-set thresholds.

You can borrow money from the business without any tax implications as it is your own account.

If the business fails you will be personally liable for any debts.

You will need to prepare annual accounts, which are not required for submission to HMRC.

You are required to submit a personal tax return (and partnership tax return if applicable) to HMRC every year.