Sole Trader Vs Limited Company:
Advantages and Disadvantages
See how much you could save by registering as a Limited Company, simply enter your annual profits below:
Enter your projected annual profits:
Tip: This figure should exclude all business expenses i.e. rent, travel, utilities.
The differences between a Sole Trader and a Limited Company
Each structure has advantages and disadvantages which are outlined below to help you choose the best option for your circumstances.
A limited company is its own legal identity, so as a shareholder your liability is limited (hence the name 'limited by shares').
As a sole trader, there is little distinction between you and the business. Any business debts become your debts and your personal assets - including your house - are not protected.
In a limited company, tax is deducted from directors' salaries via PAYE and paid at regular intervals to HMRC. All directors are also obliged to complete a tax return unless you received absolutely no pay or benefits; irrespective of whether any tax is owed. If applicable, higher tax rate is paid by shareholders on dividends under the self-assessment regime. Corporation tax is payable 9 months after the year end, by filing a company tax return.
Sole traders pay tax on their business profits, after expenses have been deducted, via the self-assessment tax return system. The deadline for online tax returns is 31st January after the end of the tax year.
Within a limited company, both employer's and employee's National Insurance (NI) is payable on directors' salaries and bonuses. This NI charge is greater than that paid by a sole trader/partner, who pay Class 2 NI contributions of £2.80 per week and Class 4 contributions dependent on profits in excess of £8,060 (rates accurate for 2016/17).
Profit and Loss
For limited companies of any size, corporation tax is charged at 20%.
For a sole trader/partnership, profits are taxed as follows for the 2016/17 tax year, the personal allowance has been increased to £11,000. This is the amount you can earn before paying any income tax at all.
For income in 2016/17 above this threshold, you will be taxed at the following levels:
- The Basic Income Tax rate of 20% on income up to £32,000
- The Higher Income Tax rate of 40% on income between £32,001 and £150,000
- The Additional Income Tax rate of 45% on income over £150,000
For the 2016/17 tax year you can therefore earn £43,000 (£11,000 personal allowance plus basic income tax rate threshold of £32,000) before you need to start paying the higher income tax rate of 40%.
In a limited company, losses can only be carried forward and set against future profits or set against the previous year's profits. For sole traders, losses can be set off against other income in the same tax year, carried back to previous years or carried forward.
A limited company must prepare annual accounts (also known as 'statutory accounts') from the company's records at the end of the financial year. These are to be filed with HMRC as part of your tax return as well as sent to all shareholders and Companies House. A limited company must also file an Annual Return to HMRC, which includes information about the directors, shareholders and registered office.
Sole traders/partners are not legally required to have annual accounts to or file accounts for inspection. However, a record of business expenses and personal income are required for tax returns.
An incorporated company, whilst not guaranteeing reliability, gives the impression of a soundly based organisation and may appear more credible. In certain sectors, contractors or agencies may not work with sole traders because of the legal protection a limited company provides.
This page should have helped you answer some important questions, including; “what is a sole trader business?” and “what is a limited company?”.
As you can see, being a sole trader business and a limited company are two completely different things. Strictly speaking, you can’t have a sole trader company as the word ‘company’ should only be used when you’ve registered your business with Companies House (which we can help with via our company formation services). It’s worth pointing out that it is possible to make the move from sole trader to limited company.
There are advantages of being a sole trader and there are advantages to being a limited company - use the limited company vs sole trade calculator to give you an indication of what’s best for you. We hope you find it useful.
This calculator is brought to you by TaxAssist Accountants:
The Accountancy and Tax Service for Small Business