Should I Operate In Business As a Sole Trader?
One of the most frequent questions we get asked is whether a business should operate as a sole trader (and file Self-Assessment tax returns) or a Limited Company. Here we discuss the pros and cons of both approaches.
- Starting up – It is as easy as telling HMRC that you are self-employed when it comes to setting up as a sole trader, whereas a Limited company would need to formally incorporate a company at Companies’ House. Often, therefore, a sole trader can be cheaper to start up, although here at Quant Accountancy we offer all company incorporations for free when you sign up to our annual contract.
- Ongoing responsibility – The statutory obligations for a Limited company tend to be far greater than those of a sole trader. For example, a Limited Company needs to file an annual Confirmation statement and annual accounts with Companies’ House as well as accounts and tax returns with HMRC every year. A sole trader is only required to submit an annual self-assessment tax return detailing their profits for the period.
- Fees – accountancy fees for a sole trader tend to be lower than those for a Limited Company who tend to have far more complex filing requirements.
- Privacy – Every Limited Company has a profile on Companies’ House which can be searched for. Whilst the information that can be obtained is often very limited (due to small company exemptions and abridged accounts) there is a higher level of privacy that comes with being a sole trader in business.
- Closing your business – If you decide that you no longer wish to be in business, as a sole trader you can simply cease trading and file your final tax returns up to the date you decided to stop. This should be compared with the fairly detailed process of going through a formal winding-up or liquidation process if you operate through a Limited Company.
Whilst the above details some of the benefits of operating as a sole trader, it also has its drawbacks. The biggest risk faced by businesses operating in this manner is the lack of limited liability. In simple terms, should your business face financial difficulties then you are personally responsible for all of its debts and any claims made against it. In a Limited Company, your exposure would be Limited to the capital you have employed in the business, as your personal finances are distinct from those owned by the business.
Some customers may (incorrectly in some cases) assume a Limited Company is more structured and some go so far as to only work with these type of entities.
Finally, shareholders in a Limited Company will be entitled to make payment by way of a dividend. This is deemed to be a share of the company profits after it has paid its corporation tax and is distributed to its owners free of any national insurance. Depending on the profits that your company makes, this could be a more tax efficient way of extracting cash from your business.
