Ainsworth & Co, Chartered Accountants and Business Advisors.

Sole Trader or Limited Company ?

This is a guide to the differences between a Sole Trader and a Limited Company including HMRC and Companies House requirements.

CONSIDERATIONS SOLE TRADER LIMITED COMPANY

LEGAL

The Business: The owner(s) and the business are regarded as the same person(s) in law A company is a 'person' with a separate legal identity
Ownership: If a partnership - then written agreements are advisable The ownership of companies is determined by the issue of shares to Shareholders
Number of
owners:
There is no limit to the number of Partners There is no limit to the number of Shareholders
Officers: A private company must have at least one Director
Rules of Personal
Conduct:
Directors' responsibilities are defined by law
Confidentiality & Privacy: The Sole Trader has more control over the privacy of the business's finances because Accounts are not made public Small companies file Abbreviated or Micro-Entity Accounts with Companies House which are available to the public
Employed or
Self-Employed ?
HMRC use the 'Badges of Trade' to decide if a person is employed or self employed

Partnerships - See IR35 below



Companies - See IR35 below
Audit: Audits do not apply to Sole Traders Small companies do not need an Audit unless required by its own rules


RISK AND
LIABILITY
Personal Assets: Fully open to business risk



A Sole Trader is personally liable to meet all the business debts
Directors are not liable for business debts if they are law abiding and not negligent and not trading when insolvent

Shareholders are only liable for business debts (in their capacity as shareholders) to the nominal value of their shares
A Sole Trader may be forced to sell personal property including a home Directors may secure loans on personal assets for which they will be liable
Personal guarantees are sometimes required by banks Personal guarantees are often required by banks
Partners are joint and severally liable
Solvency and
Liquidity issues:
No specific restrictions on trading at a loss but owners are personally liable for the debts of the business Solvency and liquidity are legally defined

If a company trades whilst insolvent its Directors become personally liable for the debts incurred
Liability Summary:
The Sole Trader is personally liable for the liabilities of the business The Shareholders are only liable for the liabilities of the company up to the nominal value of the shares

Directors may be liable if they act illegally or negligently or trading when insolvent
TAXATION
Business Tax:
Income Tax - calculated on the business profits
Corporation Tax - calculated on the business profits
Salaries:
Business owners do not have salaries
Directors are classed as employees and are taxed on salaries and benefits
Drawings: Drawings are not taxed The expression "Drawings" technically does not apply to companies
Dividends: Dividends do not apply to Sole Traders Dividends are paid to Shareholders and are considered to be paid net of tax and are not a tax deductable expense for the company
PAYE Scheme: PAYE required for employees

Not required for owners

Online filing now compulsory
PAYE required for Directors and employees

Not required for shareholders

Online filing now compulsory
VAT: There is little difference between Sole Traders and Limited Companies

Online filing now compulsory
Limited Companies There is little difference between Sole Traders and Limited Companies

Online filing now compulsory
IR35: HMRC use IR35 rules to decide if a Partnership is acting as an employee on a contract HMRC use IR35 rules to decide if a Shareholder/Director is acting as an employee on a contract
Allowable Expenses: Webpage Link: What Expenses can I claim ? Webpage Link: What Expenses can I claim ?
P11D / Benefits: P11D may be required for employees but not for the Sole Trader P11D is required for Directors and possibly employees
CIS: For contractors and sub-contractors in the Construction Industry Scheme CIS For contractors and sub-contractors in the Construction Industry Scheme CIS
National Insurance
On Sole Traders:
Class 2 NI Payable Weekly

Class 4 NI Payable on Profits
Class 2 National Insurance not applicable to companies

Class 4 National Insurance not applicable to companies
National Insurance
Employees:
Class 1 Payable by employees only

Class 1A Payable on employees' taxable benefits
Class 1 Payable by Directors and employees

Class 1A Payable on Directors and employees' taxable benefits
ACCOUNTS
Owners Copy: Owners copies as required - no legal rules Full Statutory Accounts for Shareholders
HMRC Copy: Simple Profit and Loss Account and possibly Balance Sheet

Filed online under Self Assessment

iXBRL format for filing now compulsory
Full Statutory Accounts + extra information for HMRC


Filed online under Corporation Tax

iXBRL format for filing now compulsory
Companies House: No filing requirements Abbreviated Accounts for Companies House

Online filing is optional
Accounting
Records:
HMRC have extensive powers to inspect records HMRC have extensive powers to inspect records

Requirements defined by Company Law
COSTS AND
SAVINGS
Accounting Fees: Simpler Accounts format saves Accounting Fees


Income Tax can be straightforward
Statutory accounts have specific formatting and disclosure requirements

Corporation Tax is generally more complex
Administration Time: More time consuming - particularly in time - board minutes, Annual Returns, registers, etc.
Tax Rates: Basic Income Tax Rate is 20% Basic Corporation Tax Rate is 20%
National
Insurance:
Low earnings exemptions apply to
Class 2 NI and Class 4 NI
Class 4 National Insurance not applicable therefore potential significant savings
ACQUISITION AND
DISPOSAL
Conversion to
Limited Company:
Potential tax breaks with Goodwill Potential tax breaks with Goodwill
Sale value: Potentially more difficult to value as the owner and the business are 'one' Shares easier to exchange

Potentially easier to sell - clean share purchase
OTHER ISSUES
Clients and
Customers:
Are people more comfortable with a Sole Trader? Are people more comfortable with a Limited Company?
Creditors: May feel more vulnerable because Accounts are not on public record and could be very basic May feel more vulnerable because of the limited liability but they can examine the published Accounts
Credit Agencies: Only basic personal information available for credit agencies Will publish their assessment of the company for anyone to purchase
Brand: Associated with the Sole Trader More professional in appearance? More prestige?
Business Stationery: (a guide - not definitive) The individual must be named and easily identified on all business papers
Legal requirements:
Company name
Registration number
Registered Office
Place of business
Either all or none of the directors
Also a requirement for emails



We hope we have been able to help with the following questions:

Should I trade as a Sole Trader or Limited Company?


Should I trade as a Limited Company or a Sole Trader?