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Although the sole trader route, more commonly referred to as being ‘self employed’, is the most popular way of running a business in the UK, there are significant advantages of operating as a limited company.
Below is a list of the main benefits a limited company gives you as opposed to working as self-employed.
Starting up as a sole trader is by far the simplest way to start a business in the UK. All you need to do is inform HMRC that you are working as ‘self employed’, and account for your business activities through the annual self-assessment tax process.
Setting up as a limited company involves a more complex formation process, and the financial and administrative responsibilities of running a limited company are certainly greater and more complex than those of a sole trader.
There are both advantages and disadvantages to the self-employed and the limited company routes. Depending on your own particular circumstances this will dictate which option is best for you so it’s important to look at the key differences between these two business structures.
One of the main advantages of running your business as a limited company is that you are more likely to pay less personal tax than a sole trader.
Limited company profits are subject to UK Corporation tax, which for the current 2018/19 tax year is set at 19%. The Government has stated its intention to cut UK Corporation Tax to 17% from the tax year starting in April 2020.
If you are the director and shareholder of a limited company, you may choose to take a small salary and draw most of your income in the form of dividends.
Going down this route can minimise the amount of NI contributions you have to pay because limited company dividends are taxed separately and are not subject to NICs.
The difference is as a sole trader your entire income is subject to NIC rules. Running your business as a limited company could therefore help you to take home more of your earnings.
Running a limited company means you have the reassurance of ‘limited liability’.
This in turn means that assuming no fraud has taken place, your ‘limited liability’ will not be personally liable for any financial losses made by your business. As a limited company you can therefore gain added protection should things go wrong?
Self-employed sole traders do not enjoy such protection from financial claims if things go wrong with their business and can be personally liable.
A limited company is a completely separate entity from its owners. Everything from the company bank account, to ownership of assets and involvement in tenders and contracts is purely company business and separate from the interests of the company’s shareholders.
A sole trader and his or her business will be treated as a single entity for tax and administrative purposes.
In many industries, having a limited company can provide a more professional image and provide the security that future clients are looking for.
If you are doing business with larger companies, you may find that they prefer to deal only with limited companies rather than sole traders or partnerships.
Ascertaining funds can be difficult for any types of business in the current climate. But because a limited company is a distinct entity from its owners it could be a little easier for a company to secure business finance than it is for their sole trader counterparts.
Once registered with ‘Companies House’ the law protects your chosen company name. No one else can use the same name as you, or anything deemed to be too similar.
Unfortunately as a sole trader, it’s possible someone else could trade under the same name as you, and you couldn’t do anything about it. This could be damaging for your business and cause mistrust if a similarly named business is offering a poor service. Reputation is key in any business so this type of issue can cause untold damage.
Don’t be under the illusion that it is significantly cheaper to set up as a sole trader as opposed to a limited company as this isn’t the case. You can form a limited company from as little as £15, so the price of setting up a company really is minimal.
On the whole accountants will charge more for preparing annual accounts for a limited company than they do for a sole trader.
Whereas you would have paid your accountant to handle all of the administration involved with a limited company much of this can now be done online.
Doing the administration paperwork and submitting your own confirmation statement greatly reduces the cost of using an accountant.
A limited company can fund its employees’ executive pensions as a legitimate business expense. This can offer a tax advantage over those who are running their business as self-employed.
If a shareholder wishes to retire, sell his shareholding, or dies, it is far easier to transfer ownership of a limited company than a non-registered business structure. The existing structure of the limited company offers a much easier transition of ownership.