In the UK, the most popular way of running a business is through the sole trader route, which is commonly referred to as being self-employed. However, there are considerable advantages of operating as a limited company. There is no doubt that the simplest way to start a business is by setting up as a sole trader. All that you are required to do is inform HMRC of the nature of your venture and through the annual self-assessment tax process record all your business activities. A limited company entails a more complex formation process, and the financial and administrative responsibilities are considerably greater than those of a sole trader.
If you are having trouble deciding which route for setting up a business is suitable for you then can consider the following list of questions:
• Are you interested in making an annual profit of more than £25,000?
• Do you want to incur many expenses?
• Are you likely going to perform all your own paperwork and admin?
• Are you going to consider the image of your company as an important factor of your success?
• Have you thought about a pension or retirement plan?
• Are you expecting earnings to fluctuate relatively from year to year?
Considering the above important questions can help determine which kind of business best suits you. But if you are confused whether you should move from being self-employed to a limited company, then consider the following benefits related to limited companies:
The comparative benefit behind running a limited company as opposed to a sole trader is the ability to pay less personal tax. Small businesses are taxed by the ‘small profits rate’ which is currently set at 20%, whereas company profits are subject to Corporate Tax. Limited companies are able to minimize the amount of National Insurance Contributions (NICs) by taking a small salary and take most of their income in form of dividends. However, sole trader’s income as a whole is subject to NIC rules.
2. Different and Independent Identity:
A private limited company is a complete distinct entity from its owners. All financial accountability such as bank accounts, ownership of assets, involvement in tenders is purely separate from the interests of the shareholders. On the other hand, a self-employed are accountable as a single entity for tax and administration purposes.
3. Limited Liability:
This provides a great advantage in the case of limited companies when things might go wrong. If any financial losses are made by the company the owners will not be personally liable for it. As mentioned in the above point that both are rendered as distinct entities. A sole trader will be responsible for all the losses incurred but his company will be responsible if he’s limited according to squareaccountantsnorwich
A limited company’s image is displayed as being professional and reliable. Large companies are unlikely to conduct business with sole traders due to the lack of presence and accountability in the market.
It might be difficult for sole traders to appeal for funding as compared to limited companies. Because limited companies are considered a distinct entity from its owner they might have an edge at securing business finance.
If a shareholder is interested to sell his shares, retire or dies, it is much easier to transfer ownership of a limited company as compared to a sole trader.
As a limited company you register the name and thus are protected by law, but sole traders might not benefit from the same. It is likely that someone else could trade under the same name as their and this could considerably damage their image.
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