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What form of business vehicle would suit you best? Much of the advice online is geared towards the tax efficiencies of the different forms of business entities. However, you need to look at your new business venture in the round, making sure that you select the right model to suit your own particular circumstances.

Below we'll explain what the typical business entities are and their pros and cons to help you make an informed choice of what is best for you. Our advice is, that having looked at and understood your options, that you seek the professional advice of an accountant before making your final decision.

What UK business structures are there?

Sole Trader

Trading under a business name as an individual.

Partnership

Trading under a business name with others.

Limited Liability Partnership

Trading under a business name with others but where partners have limited liabilities.

Limited Company

Trading as a separate, incorporated business.

Which business structure is best for you?

If you're an individual, the two partnership formats may not currently be relevant to you. We'll start by looking at some of the considerations that should figure in your thinking around Sole trade and Limited company:

  1. Do you have plans for growth – expanding the business to take on more work, bringing in employees or sharing the business with others?

  2. Will you be exposing yourself to significant commercial risk in the work you’ll be undertaking?

  3. Do you have any administrative support - are you comfortable handling legal and statutory business requirements?

  4. How important is it that customers perceive you as running a visible, registered business verifiable on Companies House? 

Armed with the answers to these questions let’s take a look first at the Sole trade option.

Trading as a Sole Trader

Trading as a Sole Trader

What do you need to know?

The first thing to remember about running a business as a Sole trader is that you and your business are one and the same thing.

 

Many new businesses in specialist trades and services like plumbing, hairdressing, electricians etc often begin in a small way trading independently under their own name.

 

Making this choice means that you are personally responsible for your business. You can employ people, but your business is ultimately owned and run by you. Because you and your business are one and the same it also means that you are personally liable for any debts and losses that your business makes. On the other hand, it also means that you get to keep any after-tax profits!

 

As a Sole trader you will need to register for income tax Self-Assessment, keep proper business records and be able to report your profits or losses on your Tax Return each year.

What taxes are there for Sole Traders? 

  • VAT but only if your trading income is over the VAT threshold, currently £85k pa;

  • Income Tax on the profits you make from your business;

  • National Insurance Contributions under Class 2 (just over £3.45 per week, so around £179.40 pa)

  • National Insurance Contributions under Class 4 at 9% on your profits above £12,570 for a tax year.

If you opt to start your business as a Sole trader and find that you want to expand and bring in others to work with you as oppose to for you this is very difficult to do and you may, at that point want to look at the other options of forming a Partnership or incorporating your existing business into a Limited company.

Sole Trader Advantages

  • You get to keep all your business profits (subject to personal taxes of course!)

  • You have greater privacy in your business performance and activities

  • There are fewer statutory and admin requirements

  • Depending upon your level of profits (less than £25k pa) you will likely have less tax to pay then being an incorporated business

Sole Trader Disadvantages

  • You are personally liable for the losses and debts of your business

  • You can’t bring in family or friends to share in the business

  • If you are expected to make profits in excess of £25k pa it is typically less tax efficient being a sole trader than being a limited company

Trading as a Limited Company

Trading as a Limited Company

A limited company is a separate legal entity that you can use to run your contracting, or any other kind of business – even if you’re a one-person business. You would become the director and probably sole or main shareholder in the company.

 

As a director of a limited company, you are responsible for any legal, financial and commercial decisions which the company takes. It’s important to remember that the company’s assets and liabilities are completely separate from your personal finances.

 

One of the advantages of running a business through a limited company is that, providing that you act lawfully and with due care, if the company has any debts which it cannot meet; it’s not your personal responsibility to meet them. Your exposure is ‘limited’ to the value of the money you have invested in it (often a £1 share).

 

With a limited company you can bring in new investors or individuals to help you run and grow the company and give them shares in return.

 

Many agencies and end clients in the contracting industry will only engage contractors who use a limited company as their trading vehicle.

 

Directors of small limited companies are often rewarded through a combination of an annual salary and dividends. You will need to decide which salary is best for your circumstances.

 

A limited company has to file an annual confirmation statement, annual accounts with Companies House and a tax return to HMRC. Additionally certain information about ownership and how the business is doing is in the public domain.

What taxes would you pay through a Limited Company?

  • VAT but normally this is only required if it’s trading income is over the VAT threshold, currently £85k pa, of the company decided to become VAT registered on a voluntary basis. There are VAT simplification schemes which can be used to reduce the admin burden;

  • Corporation Tax which starts at a rate of 19% rising to 25% dependent on company profits;

  • National Insurance Contributions of 13.8% on director’s salaries above £9,100 pa;

  • The company, as an employer, will hand over any PAYE and employees national insurance deducted from a director or employee's salary.

It’s worth pointing out that if you do decide to trade through a limited company you will also need to register for personal Self Assessment and pay tax on your dividends.

Limited Company Advantages

  • As a director/shareholder you have limited liabilities

  • It is easy to close down a company and make a clean break

  • Your agency/end client may be more comfortable contracting with you via a limited company

Limited Company Disadvantages

  • There is more administration and there are greater legal obligations in running a limited company

  • The ownership and performance of a limited company is a matter of public record

There are both pros and cons to operating through your own sole business or working through a company. Making a choice to go down one route or the other does not need to be an irrevocable decision but we do suggest that if you are unsure you should consult an accountant to help guide you.

Ready to set up a limited company?

Think you're ready to set up your limited company? Let us guide you through the process.

How do you set up?
Ready to set up a limited company?
How do you set up?
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