If you're thinking doing business in the United Kingdom, first decision you need to make is about your business structure. You need to decide if you will be doing business as sole trader or limited company.
It is very important to choose the right legal structure for your business. Each business structure has its own limitations and advantages. How efficient is your business taxes will depend on the business model you will choose to do the business. To help you decide which business model is right for your business, we will explain in this article difference between sole trader and limited company business structures.
There is no one right or wrong answer when comparing sole trader vs limited company. The business structure will depend on your personal circumstances. It is very important to first analyse each individual's circumstances before deciding a business structure.
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What is the difference between sole trader and limited company?
Very first critical difference between sole trader and limited company is the type of the entity. If you are doing business as a sole trader, your business and you as individual will be considered as one single legal entity. But if you're a director of a company, you and the company will be two separate entities. This difference is very critical when it comes to liabilities. More details below.
What are my liabilities as a sole trader? Will I personally be liable for my business debts?
As we explained above, if you are doing business as a sole trader then you and the business are one single entity. You as an individual will be personally liable for any business debt which includes trade creditors, any business loans, or other debts which you might have taken for your business.
What are my liabilities as a company director? Will I personally be liable for business debts?
As explained above, if you are doing business as a limited company, you as company director and the company are two separate legal entities. The word limited is to limit your liability as a company director. Therefore, you will not be held personally liable for any company debt unless you give personal guarantees for any company debts.
How do I pay myself in a sole trader business?
As you and the sole trader business are not separate legal entities, whatever money you will make as sole trader will be considered as money made by you personally. For HMRC's point of view, all money earned in a soldier business will be the money of the sole trader, and the person can keep all the money. This is one of the most important factors to consider when you compare doing business as a sole trader vs limited company.
How do I pay myself in a limited company?
In case of a limited company, profits earned by the company are not the profits earned by the directors of the company. As limited company and its directors are separate entities, all the money earned by the company will be considered as the money earned by the company, not its individual directors. To withdraw the money from the company, there must be a legal arrangement in place to withdraw the money from the company. This is normally done through a combination of salary and dividend. See dividend allowances for 2023-24 to find out how tax is calculated on dividends.
Sole trader vs limited company - Which business model is better to keep things private?
If you want to keep your business private and do not want to show any of your business possition to anyone, then business as a sole trader is the best structure compared to the limited company. As a sole trader you will prepare your self-assessment tax return and will file it to HMRC. Your personal tax records are not public information and will only be filed to HMRC. Private information is one of the key differences between sole trader and limited company.
In case of a limited company, a limited version of the full accounts known as abridged accounts, or as previously known as abbreviated accounts, will be filed to the Companies House. These accounts will have at least a balance sheet and the name of the director who signed the balance sheet. A balance sheet will show a summary of all the assets and liabilities your business had at balance sheet date. If your accounts are prepared in accounting standard FRS 102, Section 1A, abridged accounts will have notes to the balance sheet as well.
What are the deadlines for a sole trader business?
Sole traders are required to file their self-assessment tax returns every year by 31st January, following the tax year end 5th April. A sole trader accounts will be prepared to calculate and include the taxable net profit in the personal self-assessment tax return of the sole trader.
What are the deadlines for a limited company?
Companies are required to file company accounts to Companies House and corporation tax return to HMRC, with full Companies House accounts in IXBRL format. Company accounts are normally due within the 9 months from the financial year end date. For example, if company financial yearend is 30th April 2023, the accounts due must be filed by 31st January 2024. The corporation tax return is normally due within the 12 months from the company financial year end. For example, if the company yearend is 30th April 2023, the corporation tax return must be filed by 30th April 2024. However, the corporation tax normally is payable in 9 months and 1 day from the end of the financial year.
Difference between sole trader and limited company taxes
Sole traders pay their taxes based on their total income. There are different tax rates in the UK.
Income Tax Rates and Bands 2023-24 Tax Year
Tax Band 2023-24 - Personal Allowance, Taxable Income up to £12,570, Tax Rate 0%
Tax Band 2023-24 - Basic Rate, Taxable Income £12,571 to £50,270, Tax Rate 20%
Tax Band 2023-24 - Higher Rate, Taxable Income £50,271 To £125,140, Tax Rate 40%
Tax Band 2023-24 - Additional Rate, Taxable Income Over £125,140, Tax Rate 45%
Corporation tax rate have changed recently. The corporation tax rate is 19% for the companies with the profits under £50,000. Corporation tax rate for the companies with the profit over £250,000 is 25%. If profit is between £50,000 and £250,000 then a marginal relief available.
If you need any help deciding whether you should be doing business as a sole trader or limited company, we can help you. Please contact us on 020 4531 8266 for free consultation.