| CONSIDERATIONS | SOLE TRADER |
LIMITED COMPANY |
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LEGAL |
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| 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 | ||
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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 | |||
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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 | ||
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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 |
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| Audit: | Audits do not apply to Sole Traders | Small companies do not need an Audit unless required by its own rules | ||
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RISK AND LIABILITY |
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| 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 |
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| 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 | ||||
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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 |
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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 |
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TAXATION |
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Business Tax: |
Income Tax - calculated on the business profits |
Corporation Tax - calculated on the business profits |
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Salaries: |
Business owners do not have salaries |
Directors are classed as employees and are taxed on salaries and benefits |
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| 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 |
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| 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 |
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| 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 | ||
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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 |
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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 |
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| 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 |
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| Companies House: | No filing requirements |
Abbreviated Accounts for Companies House Online filing is optional |
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Accounting Records: |
HMRC have extensive powers to inspect records |
HMRC have extensive powers to inspect records Requirements defined by Company Law |
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COSTS AND SAVINGS |
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| 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 |
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| 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% | ||
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National Insurance: |
Low earnings exemptions apply to Class 2 NI and Class 4 NI |
Class 4 National Insurance not applicable therefore potential significant savings | ||
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ACQUISITION AND DISPOSAL |
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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 |
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| OTHER ISSUES | ||||
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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? |
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| 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 |
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Ainsworth Accountants: Accounts, Tax 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.
Update to UK Corporation Tax Rates:
HMRC Corporation Tax Rates
We hope we have been able to help with the following questions: