Company No: 09234927 Registered in England and Wales

156 Hanworth Rd, Hampton TW12 3EY, UK

Tel: 020 8234 6184

©2019 by Seed Accounting Solutions Ltd.

  • Rosie Morley

Sole Trader v Limited Company - what's the difference?

There are significant differences between the two, so it is important to know the difference when setting up your business. Here are some of the main differences.

Sole Trader

You are the business

You are the owner

You are the manager/proprietor

You are held liable in the case of a legal dispute - this means you will be sued unless suitable insurance is held

You are self-employed

Tax due; Class 2 NICs, Class 4 NICs (on taxable profit), Income tax (dependant on tax codes and NICs rates)

Losses - can be offset against another income

You can withdraw cash from the business without any tax effects

Sole Traders can borrow money from their account with no tax effect

You can only have a personal pension

If the business fails, you will be liable for the debts

There is no requirement (at present) to maintain and prepare accounts for tax purposes. Your accounts are not submitted to HMRC unless under investigation. You will need to submit your taxable profit via Self Assessment tax return

If you decide to sell the business, any gain incurred will result in Capital Gains Tax

You can withdraw any amount of the profits but it is not classed as income

You obtain tax relief for expenses that are incurred wholly or exclusively for the purpose of trade, you can also claim a proportion of an expense if it is business related.

Sole Traders can claim capital allowances on a car, with a disallowable amount for personal use

Mobile Phones will be subject to private use so it is expected you will only claim a portion

Capital allowances available on computers - if there is a substantial personal use, only a portion can be claimed

Tax free benefits and incentives do not apply to sole traders

You can claim a set amount for working from home

A sole trader cannot charge themselves rent

Limited Company

You are a separate legal entity to the business

You are a shareholder, holding either all, or the majority of the company's share capital

You are a representative of the company, serving as its officer

The company is held liable in the event of a legal dispute (apart from in certain circumstances involving fraud, health and safety, environmental acts, corporate manslaughter and companies acts)

A director is an officer of the company. This does not make you an employee of the business in terms of employment law, NMW or Tax Credits, but will be for income tax and NI

Company pays Corporation Tax (lower than higher rates of income tax), employees and office holders are subject to PAYE and NICs on their earning, shareholders are taxed on their dividends, IR35 rules on consultants

Losses - company losses can be offset against company profits but not on an individual income

Any money withdrawn from the business will either be dividends or earnings and will be subject to PAYE and NIC

Borrowing by directors is permitted, but it costs: 32.5% tax charged to the company if loans not repaid within 9 months of the year end. Any interest-free loans incur a tax charge to the director

Company schemes can be set up (and are often more generous than personal pensions) Auto enrolments is also a consideration if you employ anyone

If the company fails, your liability is limited to the amount on unpaid share (if any) unless a personal guarantee has been made on borrowing. If you continue trading when the company is insolvent, causing financial loss to creditors, a director will be held personally liable

You must prepare annual accounts = these can be abbreviated accounts for Companies House, however HMRC require full accounts in iXBRL format. Accounts must be prepared in accordance with accounting standards

When a business is sold, the company pays tax on any profit it makes on disposal, the shareholders are then also taxed on income received from the distribution of proceeds

There is no restriction on the size of your salary, but it is subject to PAYE and NICs

The company obtains tax relief for any expenses incurred wholly and exclusively for the purposes of trade. If a director incurs private expense through the company, they may be treated as earnings (thus subject to NICs and PAYE)

The company obtains full capital allowance on cars, irrespective of any private use. It is not tax efficient to provide company car drivers with fuel for private use - employers should reimburse company car drivers for business mileage

Mobile phones can be provided free if the contract is in the company name

No tax consequences on purchasing a computer is required for business

Many different benefits and employment incentives can be provided free of tax (company also receives tax relief on these)

You can claim £4 per week without receipts for working from home

A director can set up a license between you and your company to rent an office in the home/outbuildings. This income would then need to be declared on a self assessment (however it allows you to recharge a proportion of mortgage interest and council tax, which would otherwise be unclaimable)

If you would like further information reading any of these points please do not hesitate to contact us. #soletrader #limitedcompany #ownermanager #smallbusiness #selfemployed #selfassessment #companydirector