Regardless of size, all businesses must have a legal structure. Setting up your business in the right way can help keep costs down and your responsibilities in order. Choosing the best structure option for your business isn’t always easy – we look at two of the most popular business structure options – Sole Trader and Limited Company:
Sole Trader and Limited Company:
If you set up as a sole trader, you are one and the same legal entity as your business. This means that if your business profits cannot cover your bills, you are personally liable to pay them. Conversely, a limited company (LTD) is a separate legal entity to your personal assets.
Admin and Pay
The admin for a sole trader is limited to basic record-keeping and an annual self-assessment. Self-employed status means the profits are yours whether you draw them or not, so you pay tax on them in the same financial year.
Limited company admin is made up of annual statutory accounts, a corporation tax return and a confirmation statement, which can be slightly more complex for a non-accountant. With a limited company, you can leave money in the business if you are in the higher tax bracket this year and plan to withdraw less next year, which can help save some tax. Options to withdraw money from a LTD are salary, expenses, benefits and dividends (dividends only from available profits).
Limited companies tend to be more advantageous tax-wise due to the option of drawing a small salary from the company and taking the rest in dividends, the first £5k of which are completely tax free for the 17/18 tax year. Bear in mind this is due to drop to £2k for the 18/19 tax year.
You can’t ‘use’ a limited company just to save tax though, and must be particularly careful if you are a limited company contractor only contracting your services out to one company. HMRC have a great employment status indicator, which helps to identify if a company should be employing you or if you are a genuine freelancer. IR35 can catch you out even if you are set up with the most innocent of intentions, so speak to an accountant about what this might mean for you.
Consider what you can claim in a limited company versus being self-employed. If you are interested in topping up a pension fund, then a limited company allows you to contribute up to £40,000 which will reduce your taxable profits. When you are self-employed, your contributions vary in line with your earnings. You can also get access to tax free benefits as a director and/or employee of a limited company that you wouldn’t have when self-employed. (You can check out our video guide to expenses)
So, being self-employed gives you simplicity in admin and is quick and easy to set up. A limited company can be more burdensome in terms of admin, but has a few perks and tax benefits that you wouldn’t otherwise have access to. There’s lots more info available about these options on the HMRC website, or if you are unsure of how to structure your business, please contact us on 01793 741 600. Our friendly team would be more than happy to take a look at your specific circumstances and recommend the best option for you.