Should my business function as a Sole Trader or a Limited Company?
For a newly established business enterprise or an emerging one, the dilemma in the proprietors about whether to function as a Sole Trader or a Limited Company is omnipresent. Both come with their own peculiar sets of advantages and disadvantages that have to be analysed very carefully before deciding upon the ideal choice. A careful evaluation of a multiplicity of factors have to be done so as to come to a final conclusion regarding the better choice. The Williams May team has compiled in this article some important facts on the two, which could help you in making the right choice.
Who exactly are Sole Traders or Self-Employed?
All self-employed entrepreneurs, working for themselves are classified by the HM Revenue and Customs (HMRC) as self-employed sole traders, including those who haven’t reported their businesses to the government. Basically, sole traders run their own businesses and so all net profit after tax can be kept by the founder of the enterprise. Conversely, all liabilities and losses have to be borne personally by the founder. Yet, a sole trader can have multiple staffs according to the requirement and so it could be implied that a sole trader isn’t necessarily dependent upon a single individual for its functioning.
What is a Limited Company?
A limited company can be termed as an organisation set up by the entrepreneur(s) for running a business. It’s an entity separate from its owners and so is responsible in its own right for it’s functions. This thus implies that the company’s finances isn’t the entrepreneur’s personal finance despite he/she investing in the company. Yet, all debts of the company aren’t payable through the entrepreneur’s own sources as well.
A limited company’s investors are called ‘members’ or ‘shareholders’, who actually own a definite portion or all of the total shares in the company and the affairs are run through directors, who may or may not be members of the company.
Any net profit after the payment of Corporation Tax makes is the company’s own profit, which may be shared according to the decision of the directors.
What should be my choice among the two?
First and foremost the entrepreneur needs to consider several factors to make the choice between starting as a sole trading or a limited company. Some important factors may include:
- Tax implications (which could differ based on the nature of the business)
- Client Base
- Desired Legal Entity
- Ownership Structures And Shareholders
- Liability considerations
In general, sole trading ventures are less expensive and much easier to manage, compared to a limited company. Yet, it’s also argued that a basic corporate structure is necessary for obtaining better business prospects, which may thus require the entrepreneurs to register a limited company. Do look into the infographic to help you in evaluating the pros and cons of both the choices, before making the right decision.
Should I consider changing from sole trader to limited company?
A lot of small and medium scale enterprises actually prefer functioning as a sole trader primarily because of its lower complications and lesser additional expenses. The penalties and accounting costs for a limited company is greater than that for a sole trader. Yet, it’s also not necessary that the tax payments on sole trading might be lower and in many cases choosing the wrong structure could cost the enterprise paying higher taxes than necessary.
Lately, it has also been noticed that a lot of agencies and customers only choose to do business with limited companies. Hence, it may even be a case of necessity for many sole traders to change into a limited company.
Changing my sole trader structure to limited company
If you have decided that changing your sole trader enterprise to a LTD is the better option, then you will need to declare the HMRC that you’re no longer going to be self-employed. You will then need to complete a Self Assessment tax return till the given period. Enterprises that have been registered with the VAT need to either cancel the existing VAT registration or transfer it within 30 days of the cancellation or face a penalty.
After the termination of the sole trading structure is formally recognised, you will need to proceed to setting up the new structure from the very start according to the provisions set by the HMRC.