Sole Trader Vs Ltd Company: What you need to know

Posted on 6 April, 2016 by Chris Grigorovsky

It was reported that the way dividends are taxed is set to change from today, and will affect sole trading and Ltd companies alike. So we decided to give you a rundown into what they both have to offer, which will give you a good indication in what choice is right for you.

Sole or Limited

Sole Trader

Being a sole trader is exactly what the name suggests. Everything is taken care of by you, from keeping records of your businesses’ expenses and sales, to sending a self-assessment tax return ever year. Your business is owned as an individual and classified as self-employed. There are many financial pros and cons you need to take into consideration about being a sole trader.

Pros:

  • Accounts are much simpler than limited companies, with an individual self-assessment tax return submitted annually.
  • Professional accountancy advice is usually required in order to prepare business accounts, tax returns and administration involved in VAT and payroll. However, there is less complexity with these matters, resulting in reduced admin costs.

Cons:

  • The tax burden is much higher compared to a Limited company.
  • It will be harder to raise funds as less established businesses are less able to repay loans compared to a limited company.

Limited Company

Running a limited company is ideal for the structured and corporate minded business person. This means shareholders are responsible for the company’s debt. Financially, there are positive and negative aspects.

Pros:

  • The tax efficiency means that you will take more pay than other options.
  • Less of a risk for personal finances due to structure and between you and the company. So if anything were to happen, you would not be under threat.
  • There are a variety of tax planning opportunities out there which can be tailored to whatever circumstance, where applicable, which would result in tax savings.

Cons:

  • With the greater range of statutory obligations, such as submission of Annual Accounts, VAT Returns and Corporation Tax Returns, there are higher financial penalties if things are not right.

The Numbers

Below are tables that give a good indication of the differences between sole trader and Ltd company, before and after the changes.

2015/16

Profit Sole Trader Limited Company Difference
£30,000 £6,000 £4,388 £1,612
£40,000 £8,900 £6,388 £2,512
£50,000 £12,790 £9,053 £3,737
£75,000 £23,290 £19,053 £4,237

Source: www.smallbusiness.co.uk

2016/17

Profit Sole Trader Limited Company Difference
£30,000 £5,920 £5,109 £811
£40,000 £8,820 £7,709 £1,111
£50,000 £12,630 £10,209 £2,321
£75,000 £23,130 £21,462 £1,668

Source: www.smallbusiness.co.uk

This should give you a good indication of what is financially viable for you, so you can get started on your search for a commercial property.




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