Should I be a sole trader or a company? We are often asked that question when people are setting up in business, and the truth is it depends on the individual scenario and what you are looking to do.
Both options have their benefits and drawbacks, and how those affect you will depend on the circumstances. Below we compare sole trader vs company:
Sole trader
Benefits
- Keeps things simple. If you are a sole trader or in an unincorporated partnership you will only have to maintain simple accounts for your income tax returns
- No Corporation Tax. By being a sole trader, you will avoid the 19% corporation tax.
- Longer to pay your taxes. As a sole trader or partner, you have almost ten months to pay your tax bill, whereas a company only has nine.
Drawbacks
- You and the business are one and the same. If the business fails there is nothing protecting you from losing everything. Your creditors can chase you for payment of the debts and your personal assets including your home can be taken to repay them.
- Rightly or wrongly, unincorporated businesses are viewed as ‘small fry’ so larger customers and suppliers may be put off dealing with you, assuming that you aren’t big enough.
- The only tax you avoid is corporation tax. If you meet the relevant criteria you will still be liable for VAT, PAYE, CIS and capital gains tax.
- You are taxed in the year you make the profit. If you have a bumper year you will be taxed accordingly and perhaps be pushed into the higher rate tax brackets, with very few tax planning options open to you.
Company
Benefits
- Limited liability. All you stand to lose should the business go bust is your initial investment. Unless you have been found to have acted illegally or negligently, then your personal assets cannot be taken to pay company debts should the business fail.
- You can take home more for less. As a shareholder you can pay yourself a combination of salary and dividends, and as the income tax on dividends is considerably less than a regular salary you can afford to pay yourself less but still take home more cash.
- You look bigger to customers and suppliers. When they are looking to deal with you they will have comfort from the fact that you are a legitimate enterprise and have obligations to Companies House and HMRC.
- You can decide when you take your income from the business and make the most of the tax allowances and brackets so that you minimise your tax bill.
- Pension contributions can be made by the company to a personal pension far more generously than if you are a sole trader.
Drawbacks
- The paperwork. You will have to submit statutory accounts to Companies House in a prescribed, legal format, and a corporation tax return and computation will have to be submitted to HMRC under the relevant tax rules.
- The additional costs. Unless you are capable yourself, you are likely to have to pay for expert help in completing the accounts and corporation tax obligations.
- You are on public record. Your involvement in the company will be public knowledge and searchable on the Companies House database. No contact details other than those provided will be available, but all your company involvements, past and present will be there.
- You have to stay on top of everything. HMRC and Companies House can pay you a visit at any time, and as a company director it is your responsibility to ensure you can provide them with accounts that give them a reasonably accurate and up to date financial picture of your business.
These are a summary of the main points, but obviously each situation will be slightly different. To speak to someone about your own situation, contact us on the details above.