It can be a very exciting time for you and your business when you register as a company. As a sole trader, you will take on full responsibility for the finances and the business has no separate identity from you. A limited liability company has a separate legal personality from the owners, meaning personal finances won’t be affected if the business starts to struggle. However, a limited liability company has more legal admin and comes with fiduciary duties for directors.
There are other important factors to consider when deciding if becoming a company is right for your business. Before making the change from sole trader to company, here are 5 points you should consider:
If you register as a limited liability company with Companies House, you will have to pay corporation tax on company profits. It is usually more tax-efficient for a large company with high turnovers and profit (over £25,000) to register as a company because the corporation tax will be lower than Income Tax and National Insurance contributions for a sole trader.
Sole traders fill out self-assessment tax returns and must be registered as self-employed with HMRC which is less complex than the tax responsibilities for limited companies.
2 Annual accounts
The main drawback of a limited company is the admin involved in preparing annual and corporation tax accounts. These must be audited and filed with Companies House and HMRC. A sole trader does not have these obligations, with the self-assessment tax return being the only administrative burden.
A sole trader’s earnings are dependent on the business performance of that year, as they keep all earnings after tax. The owners of a limited liability company may be paid a salary, which is taxed at PAYE rates, in addition to dividends, of which there is a tax-free allowance. This may lower an individual’s financial risk, but only if the company’s turnover is consistent.
4 Personal Liability
Sole traders have full control of their business and finances with much less admin, which is appealing to many. However, this business model comes with the cost of increased personal risk.
As a sole trader, the debts of the business are your personal debts. This is because, in the UK, there is no legal distinction between your assets and business assets. Creditors and clients can take you to court, and you will have to pay the costs yourself.
The owners of a limited liability company will not bear the same financial burdens, as their company is legally recognised as a separate personality. This allows personal assets to be distinguished from business assets.
A limited company may appear to clients and businesses as a more professional working model than a sole trader. Clients and businesses are potentially more likely to work with you if they perceive you as professional, or simply a ‘bigger’ organisation.
While being a sole trader offers simplicity and control over earnings, limited liability offers protection of assets and security of salaries for both owners and employees. Deciding on a working business model for your company will depend on the size and nature of the business.
If you have questions about the registration process, paying yourself a salary or dividend through a limited company, or something else entirely, get in touch with us today, and we can schedule a call at a time that suits you.