Should I Register Myself As A Sole Trader Or A Limited Company?

Should I register myself as a sole trader or a limited company?

If you have your own business, it is important that you choose the right legal status that represents it. The status that you decide on will have implications for your business’s earnings and tax.

Being a sole trader or a limited company comes with its advantages and disadvantages. So, you may be considering which is the best option for you and your brand.

Here is what you need to know about being either a sole trader or a limited company. Make sure to consider both of these statuses carefully before you register your business.

What’s the difference between a sole trader and a limited company?

Let’s begin with the difference between a business that is registered as a sole trader and a business that is registered as a limited company.

If you register as a sole trader, you are saying that you are your own company. You provide your business’s services and are self-employed. As you have full ownership of your business, essentially, you do not actually have a legal identity that is separate, and so you will take full liability of your company. As well as this, you will keep all of your profits even when you have paid tax.

Ultimately, the profits you make will be used as your salary, so you do not have to spend anything on corporate tax. Instead, you will be taxed based on the self-assessment process from the UK Government. That’s why you may want to open a bank account that is used solely for your finances as a sole trader. That way, you can make sure you keep your business finances and personal finances completely separate.

On the other hand, limited-company status will mean that your personal identity is not combined with that of your business. Instead, it is legally distinct and means you can have more than one person who owns the company. These owners each have limited business liability. Therefore, if the business ends up with financial problems, the owners will not have to involve their own personal finances. The limited company will stand as an independent entity. Even if you were the person who created it, you will be seen as an employee, rather than as the company itself.

Any profits that are created in a limited company must remain in the business and cannot be taken as a wage. That is why you need to provide a salary for yourself or be happy to take dividends if your business ends up making a profit.

Ultimately, the dividing factor between being a sole trader or a limited company is whether or not you wish to be directly tied to your business or defined by it. So, consider this carefully before you decide which one you want to register as.

What do I need to know about becoming a sole trader?

Becoming a sole trader can be seen as the easier way to set up a business. Although you may find it harder to find customers or enjoy the benefits of tax relief, there is a lot less paperwork and costs compared to a limited company. Instead, you will only need to fill out your self-assessment tax return every year and do not need to keep strict records, unlike limited companies that need to follow precise regulations.

Another benefit of becoming a sole trader is that you can create your company as soon as you like and retain complete control over it. Once you’ve paid your annual tax, you can keep all of the profits that you make.

Unfortunately, by becoming a sole trader, you may find it harder to be tax efficient without becoming a limited company. Furthermore, as a sole trader, you will have to take on the full financial risk of your business and any debts that it accumulates.

You may also find it harder to receive funding from investors. This means that it may be harder for you to grow your business, especially as some companies may outright refuse to work with you because you will not have the same legal protection that a limited company may have.

Do sole traders pay more tax?

Sole traders do not actually have to pay corporation tax. This is due to the fact that this type of tax is not paid by individuals. However, you will need to pay income tax on your profits. Tax liability is based on your profits in relation to Class 2 and Class 4 National Insurance rates.  

Unfortunately, sole traders can be subject to income tax rates as high as 45%, while limited companies with profits of more than £250,000 pay only 25% corporation tax. So, you may end up paying higher prices compared to a limited company.

The best way to find out how much tax you will need to pay is to consult your accountant. That way, you can understand whether it would be more cost-effective to be a sole trader or a limited company.

How do I change from a sole trader to a limited company?

If you have registered as a sole trader, but want to undertake incorporation to become a limited company, you should take the following steps:

  • Start by registering your small business as a limited company
  • Inform HM Revenue & Customs that you are no longer a sole trader and complete their online form
  • Send off your final self-assessment tax form by January 31st
  • Merge your sole trader business into your new company
  • Create your new bank account for your company
  • Speak to any stakeholders about your new business structure
  • Set up your tax and PAYE (Pay as you Earn) for your company

What do I need to know about becoming a limited company?

There are a lot of advantages when it comes to registering as a limited company. You will be able to raise funds and enhance your brand’s reputation and have limited liability so that you don’t have to be responsible for any business losses.

Limited companies do tend to have more credibility, due to the fact that some brands prefer to work with limited companies rather than sole traders, and can be more tax efficient to create more profits. You may also be able to apply for tax deductions and allowances.

Just keep in mind that a limited company needs to have public records, so they can be accessed by anyone who wants them, which means that such companies benefit from less privacy than sole traders. Limited companies are also more complicated to run as businesses. You will need to pay a fee and register with Companies House, and fill out tax returns to HM Revenue & Customs. If you want to set up a limited company, you may need to get the assistance of an accountant.

When should I become a limited company?

You may want to become a limited company if you find that your business is creating a lot of revenue and you can be more efficient with your tax by changing your registered status.

Another reason you may decide it is time to become a limited company is if you want to bring on new employees or feel that it’s time to get some funding for your business that can help it grow. You may also decide that you need to become a limited company if you want to look more credible as a business, especially if you are looking to grow your brand and find new customers.

Can I pay myself as a director of a limited company?

If you are the director of a limited company, you can pay yourself a salary from your business. This can be through PAYE or dividends.

Am I self-employed if I run a limited company?

As the owner of a limited company, you are technically an employee even though you are the owner of your business. Therefore, for tax purposes, you cannot claim that you are self-employed because you will receive a salary from your business.

How ST Accountancy can help

ST Accountancy is a professional firm that provides financial advice and accountancy services. It can be difficult to know which way to turn when it comes to your company, and financial issues can feel very overwhelming if you have not been professionally trained to handle your finances. That’s why you might turn to ST Accountancy for bespoke advice to assist you with your financial decisions.

Our financial specialists can look into your individual business and finances, and help you come to a decision on how you should register your business. Our financial expertise will help you to continue being compliant with any legal regulations and duties that you need to undertake.

Are you best off as a sole trader or a limited company?

Whether you are considering registering as a sole trader or a limited company, it is important that you seek advice as to which option would be best for you.

Talk to our team for business advice in Ipswich, or if you need a statutory reporting accountant in Suffolk. Make sure you look online for advice on how you should run your business and handle your finances. You should then weigh up the advantages and disadvantages before you settle on the option that you judge would suit your business best.

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