You can’t make the right decision until you know what the options are and how they’ll work for your business. Here are the key issues that will help you decide.
Sole traders pay income tax at different rates, depending on how much profit they make, and they also pay two types of National Insurance. Limited companies pay Corporation Tax at 20 percent of profits.
Limited companies can defer paying income tax, subject to some regulations. Company directors may wish to delay paying income tax on dividends during a good year, and defer paying dividends to the following tax year.
Limited company directors have the potential to pay less tax, as they can pay themselves small salaries and high dividends, which are free from National Insurance, whereas the self employed pay themselves a salary which is liable for NICs as well as income tax.
You can find out more in our sole trader tax guide.
The set-up procedure for self-employment is simpler than for a limited company. Self-employment is set up through HMRC and limited companies are set up through Companies House. Directors of limited companies have more legal and statutory duties, which means more paperwork.
With a limited company, personal and business finances are separate, so you won’t be personally liable for claims made against your company - assuming nothing illegal has taken place! If you’re self-employed, your own personal finances are at risk of being included in any settlement.
Limited company directors have various legal and statutory obligations and are ultimately responsible for providing accurate and timely accounts on an annual basis. Directors may be held accountable for corporate wrongdoing e.g. specific offences such as corporate manslaughter, or illegal acts under health and safety, environmental and company law, and listing rules.
Self-employment: If the business fails you will be personally (or jointly with your partners) liable for its debts. You may face bankruptcy.
Limited company: If the company fails, liability is limited to the amount unpaid on the shares, unless there has been a personal guarantee for the company's borrowing (which is often required by banks).
Directors can be held personally accountable if they continue trading when the company is insolvent and this causes financial loss to creditors. This could result in directors’ personal bankruptcy.
Although self-employment and partnerships are valid, credible and reliable forms of business, limited companies tend to project more credibility. In some sectors it is much easier to find work as a limited company as some agencies place more trust in limited companies due to the legal protection they provide.
Whatever business you’re in, we’ll provide our expert advice service to help you decide which business structure is best for you.
There are many steps to setting up a Limited Company, including incorporating the company, setting up a business bank account, arranging insurance cover and becoming director.
For more details about Accounts Direct Limited Company Service, click here.
Sole traders are personally trading as a business - the person is the legal entity. For more details about Accounts Direct Sole Trader Service, click here.
For more details about Accounts Direct Sole Trader solutions, click here.