There are lots of different company structures out there: sole trader, limited company (Ltd), partnership and limited liability partnership (LLP) are the main ones. In the UK, the two most popular structures are a sole trader and a limited company, so we’re going to look at them in particular.
Whether you’re a large company or a one-man-band, you need the right legal structure to run smoothly.
The type of company you choose will affect everything from your tax to your wages. Deciding whether to be a sole trader or a limited company can be a daunting task.
This article dissects the ins and outs of each business structure – and the legal requirements involved – to help you make the right choice for you. Broken down, these are the topics we are going to cover:
- What does SOLE TRADER and LIMITED COMPANY mean?
- How do I set up my business?
- If my business falls into debt, who is liable?
- How do I pay myself?
- How do I pay taxes?
- How do I claim business expenses?
- Will my business data be accessible to the public?
The one that you go for is dependent on your personal situation and long-term plans for your business.
|What does SOLE TRADER mean?||What does LIMITED COMPANY mean?
|If you’re a sole trader, legally, you and your business are one and the same. It is not a separate legal entity. For that reason, we’d think of a sole trader as a self-employed person who’s completely in charge of the business.||If you’re running your business through a limited company, the business is a separate legal entity to you.|
|So you get to keep the profits you make after tax (rather than having to share them with other shareholders or leave profits in the business). Many sole traders choose not to employ anyone, which can keep costs low and maximise profits available to them.||Limited companies are headed by a figure called a director. What is a director? The director is appointed by company members. Private limited companies in the UK are required by law to have a minimum of one director appointed at all times (Public Limited Companies require at least two). A director takes care of the day-to-day admin and finance duties of the business in accordance with the Companies Act 2006.|
|You are personally responsible for any losses your business suffers (this is called full liability).||You have limited liability – this means your company’s assets and liabilities are separate from your own individual finances. So, the company is responsible for profits and losses.|
|Sole trader is the most common type of business in the UK. According to the government, 3.4 million of the UK’s 5.6 million small businesses belonged to this type at the start of 2018.||In 2018, 1.9 million businesses in the UK were limited companies.|
|How do I set up my business as a sole trader?||How do I set up a limited company?|
|It’s a fairly simple process. You need to register with HMRC here (you must have a national insurance number).||It’s a bit more complex. If you haven’t been legally prohibited from being a company director and have no history of bankruptcy, then you’re all good to go.|
|After you’ve registered as a self-employed person, you should automatically be sent a self-assessment following the end of each tax year (which runs from 6th April to 5th April every year).||You’ve got another decision to make – you need to decide if you want to be a private limited company (LTD) or a public limited company (PLC). LTD is the more common option here.|
|This is so the HMRC know that you’ve started a business and they can expect an annual tax return from you. There’s GOV.UK guidance on setting up as a sole trader here.||After providing some personal info, you must register your company with Companies House – you’ll get a certificate of incorporation confirming your company legally exists. Registering costs around £12, and usually takes 24 hours.
|Keep in mind that other businesses can trade under the same business name as you and that this is perfectly legal.||Unlike setting up a sole trader business, the name needs to be unique. Check if your desired name has already been used by using the handy Companies House WebCheck service. When you register with Companies House, your company name is protected by law, meaning no other business can copy you.|
|At the same time that you register, your business will be logged in to pay Corporation Tax, which needs to be in place within the first three months of starting your business.|
If you’re just starting your own business for the first time, being a sole trader is a good option for you. This is the quickest and simplest way to get your company up and running. You don’t need to register a company with Companies House and fill in all their forms, although you do need to send a bunch of info to HMRC (which we will explain in further depth later). Starting a limited company is more complicated and requires a lot more paperwork than sole traders. (That said, it’s a lot easier now than it was ten years ago – and it can all be done online).
|If my sole trader business fails or falls into debt, who is liable?||If my limited company fails or falls into debt, who is liable?|
|If you’re a sole trader, you’re legally responsible for all business decisions, profits and debts. This means that if you were to be sued, for example, you’d be personally liable, meaning you could lose personal assets if your business runs into trouble.||If you’re a limited company, there’s a bit more of a safety net here. Your business and you are totally different things under the eyes of the law. So if you fall into debt, your assets won’t be at risk because your business’s assets, profits and liabilities totally belong to the company. (That being said, if you do commit fraud or a morally reprehensible crime as director of a limited company, you’re still legally liable, and will have to pay accordingly!)|
If you’re looking to expand and grow your company, a LTD may seem the logical next step. The perceived risk involved with the sole trader business model may put off some clients or suppliers. Sole traders may be seen to be less long-standing and have less prestige. By having its own legal identity, limited companies survive the death of the owners, and it’s possible for the company’s directors and shareholders to change over time. This offers more perceived security for employees. An LTD can permit you to take a calculated business risk without the prospect of losing everything.
|How do I pay myself as a sole trader?||How do I pay myself as a limited company?|
|You simply move money from your business to your personal bank account.||Limited company directors pay themselves like they would an employee, through the "PAYE" system, perhaps in addition to dividends from their share ownership.|
As a sole trader, you’re restricted when it comes to handling your income. Money arrives in your account; above the tax-free of allowance £12,500, you pay tax on it. As the director of a limited company you have a few more options. You receive income from your company’s revenue, which you can withdraw as a salary, a dividend (which attracts a lower tax rate), or you can leave it in the company altogether.
Why are dividends tax-efficient?
As a limited company, you will only pay corporation tax (19%) on your profits, rather than income tax and National Insurance on your entire income. Therefore, at the point that your marginal income tax exceeds 19%, dividends would be a more tax-efficient way to pay yourself – via a limited company. So, if your profits or non-business income is £35,000 or more, you should consider being a limited company for the tax benefits.
|How do I pay taxes as a sole trader?||How do I pay taxes as a limited company?|
|As a sole trader, you’ll have to pay out income tax and National Insurance Contributions. This happens when you send the compulsory personal Self-Assessment Tax Return to HMRC at the end of each tax year.||A limited company doesn’t pay income tax and NI contributions. Instead you pay Corporation Tax on your profits. Corporation Tax is a tax that is payable against the profits the company makes (any money made after deductible expenses). The deadlines set by the HMRC are different too.|
|Failing to send this tax return in time may mean your business gets charged with hefty fines.||By law, a limited company is required to send a yearly set of accounts to Companies House at the end of your accounting period (your accounting period goes up to the last day of the month when your business makes it to its first year anniversary).|
|Don’t forget you also have to pay NI contributions too – these are based on the level of your earnings.||Alongside your accounts, you have to fill out and send a CT600 form to HMRC which tells them about your income, and a P11D form, which details the value of all benefits and expenses provided to directors & employees. On top of the Corporation Tax, you also have to pay VAT return.|
|Check out the government website to learn more about how this process works.|
Any tips? Depending on its features, you can integrate your POS system with cloud-based accounting software – this will help you add up all the money you’ve made and the day-to-day running costs of your business throughout the year. StoreKit have explored some of the EPOS features to look for which will make sales reporting and accounting a doddle.
Keeping up-to-date and accurate records of all your sales and expenses will be crucial for the smooth operation of your business. That way, you’ll avoid getting a number-crunching headache as the dreaded self-assessment deadline looms.
If you’re a sole trader, it’s best practice to withdraw money from your business account into your used-for-business account, and then transfer what you need to your personal bank account.
If you’re a limited company, it’s actually required by law that you share company records and information about directors and shareholders with Companies House. This info is published and can be accessed by the public.
|How do I claim business expenses as a sole trader?||How do I claim business expenses as a limited company?|
|You can only claim for expenses that are used wholly and exclusively for business things. Simply add up all your expenses receipts for the year and put the total on your annual self-assessment form sent to HMRC.||To reclaim an expense, you transfer money from the company account to your personal bank account. Just as if you were a sole trader, make sure you keep hold of all your business expense receipts.|
|For assets that you use for both personal and business purposes, you can only claim the expenses paid out by you for business use. So, no cashing in on a fancy phone contract when you only use your phone for business purposes, say, 25% of the time. In this case, if the phone contract costs £100, you’re only entitled to claiming £25.||HMRC have certain guidelines around what counts as business-related expenses.|
With limited companies, the rules around claiming business expenses tend to be a bit more lenient. There’s a wider range of allowances and tax-deductible costs.
Whether you choose to run your business as a sole trader or a limited company, each legal structure has its own drawbacks and advantages. But the option that’s right for you depends on the size, nature, goals and industry of your business.
If you’re a sole trader and hoping to expand or take a business leap, it can be a good idea to go incorporated.
First, there’s limited liability if you fall into debt and second, you have more options when raising new capital. Whereas sole traders have to raise capital using their own funds/resources, limited companies are able to do this by issuing new shares. The new shares can be given to existing shareholders or new investors, but only public limited companies can offer them to the public. Banks may be more likely to hand over a larger loan to your business because of the greater accounting transparency that comes with a limited company.
Sit down with a cup of tea, spend time exploring the various legal structures available, and chat to accountants and other business owners to get their input before taking the plunge.