If you’ve decided to go into business for yourself, then your next big decision is choosing whether to register your business’ legal structure as a sole trader or as a limited company.
Choosing the right legal structure when you start a business can influence how tax efficient you are as a business. To help you understand the pros and cons of each, our friendly team of accountants have compiled a quick start guide to operating as a sole trader versus as a limited company.
What’s the difference between a sole trader and a limited company?
A limited company is a separate legal entity to yourself, whereas being a sole trader means there’s no legal distinction between you and the business.
How do I pay myself as a sole trader or a limited company?
As far as HMRC are concerned sole traders and their business are the same thing, so they can keep all of the after-tax profits that the business makes. Sole traders pay tax and National Insurance on this income by submitting a Self Assessment tax return to HMRC.
What am I liable for as a sole trader or as a limited company?
Because there’s no legal distinction between a sole trader and their business, you’ll be personally liable for what happens in the business. And yes, sadly this includes any debts which are incurred!
A limited company means limited liability for the directors and shareholders. Any debts incurred are the company’s liability, and not yours personally.
Obligations and deadlines for sole traders and limited companies
Being a sole trader means there is slightly less admin than there is if you run a limited company. You’ll still need to keep detailed records of financial activity for your business whichever structure you choose, though dedicated accounting software like Pandle can make this much easier.
Take note, the deadline for a sole trader to register for Self Assessment is 5th October in your business’ second tax year.
So, if you became a sole trader in July 2019, make sure you’re registered for Self Assessment by 5th October 2020 to avoid any unwanted fines!
Registering your business as a limited company
Setting up your business as a limited company has a slightly different process than becoming a sole trader. You’ll need to register the business with Companies House, which will sign you up for Corporation Tax and issue a certificate of incorporation.