Sole Trader vs Limited Company – A Guide to Help You Decide

Sole Trader vs Limited Company

Plotting a business is no piece of cake. Those scratching their head thinking about a business, have to jump over two major barricades first to hit the road later. One – whether to operate as sole trader or start a limited company and secondly, the costs involved.

To make a decision, knowing both the business structures a bit deeper is necessary. Allow us to make it clear to you.

Going Sole Trader:

A Sole Trader is the one running the business on its own, means a self-employed person who is the sole owner of the business. In other words, ‘be your own boss’ type. Profit or loss, you alone are the one responsible for it and it will be your personal. Surprisingly, becoming a Sole Trader today is sky-rocketing with the existence of GOV.UK website, which has given wings to a lot of aspiring entrepreneurs.

Starting a Limited:

The limited one has an entirely separate legal identity. Any loss or debts in it will be limited to the company which makes your personal assets and finances, safe. Moreover, as the director and the shareholder of the business, you can allocate 100% of the company’s shares to yourself and enjoy salary and/or dividends from the company’s available profits.

Both are tempting, right? But, there’s good and bad in everything and so does these two business structures have. The confusion arises when it comes to business expenses. Whether running a solo marathon will be beneficial or opting for a limited one will yield profits. To help you figure that out, we are presenting here some of our understandings to hasten your decision-making.

A Comparison of Expenses in Operating As a Sole Trader Vs a Limited Company

Sole Trader: Cost and time saver. Setting up one is no big headache. A bit of paperwork and you are all set.

Limited: It’s the opposite. A lot of paperwork for which you may need a Specialist Limited Company Accountant or more to handle it all.

Sole Trader: Less tax efficient. As the sole owner of your business, you will be required to pay national insurance contributions (NIC) as well as income tax as your personal. You will have to pay Class 2 & Class 4 national insurance along with income tax on all your profits, the rates of which are generally higher than the corporation tax rates of a limited company.

Limited Company: Tax efficiency is up to the mark. As a limited company, you will only be required to pay up the corporation tax on the profits gained, which is currently at a rate of 19%, fairly lower than personal income tax rates. It can be paid as a combination of dividends and salary which will minimise your PAYE (tax you pay on your earnings throughout the year) and NIC outgoings. Once you pay the tax, you can take the net profit either as a dividend or keep it with the company itself. Or the best, consult an expert in Corporate Tax Planning and have nothing to worry about.

Sole Trader allowable expenses: Being a sole trader you won’t be able to get the taste of tax-free benefits and incentives. In order to claim tax relief, your business expenses must be incurred wholly and exclusively for the purposes of the trade. HMRC has certain strict rules regarding what expenses can be claimed and what not.

There are allowable expenses (expenses that are strictly related to your business) which include office expenses like:

  • Business stationery, printing costs, equipment like computers and printers and computer software.
  • Business premises expenses like rent, maintenance and repair, utility bills, property insurance, and security.
  • Business-related travel expenses like train, bus, plane or taxi, and hotel rooms and meals costs during business trips, including vehicle insurance, fuel, hire charges, repairs, servicing and breakdown cover
  • Stock and raw materials expenses
  • Legal and financial expenses like the cost of hiring a professional like an accountant, a solicitor, etc.
  • For business reasons; clothing expenses like the cost of uniform or safety wear; business insurance expenses like the public liability insurance and professional indemnity insurance
  • Marketing expenses like print advertising, directory listings, mailshots, free samples and website costs can be claimed.

Limited Company: Just as in sole trading, even a limited company obtains tax relief for its expenses if they are incurred wholly and exclusively for the purposes of the trade but, you can claim more business expenses through your limited company than as a sole trader. Any money you claim as the director of the company in expenses will be deducted from your company’s profit and will therefore not be taxed. The range of allowances and tax-deductible costs that a limited company can claim against its profits is wider than for the sole traders.

Sole Trader: For the self-assessment tax returns, sole traders are required to maintain and their sales and expenses on a spreadsheet but the accounts do not have to be submitted to HMRC unless subject to investigation.

Limited: Limited companies are bound to prepare annual accounts under the provisions of the Companies Act and submit them online in iXBRL with HMRC.

Final Thoughts

Who doesn’t love to cut down on the business expenses no matter how the structure of the business is? Sole Trdaer or limited, as said, each has its own advantages and disadvantages, ultimately it depends upon how you plan and execute it. If you need any expert advice or are looking for any company or personal accounts and tax-related services, We are just a call away.