The most basic choice when starting a business is to decide the structure. Whereas ‘sole trader’ or ‘partnerships’ and ‘limited company’ structures are popular with a majority of small business owners, limited liability partnerships are less common. The latter are more commonly used by accountancy firms. Many differences exist between the sole trader and the limited company structures. Listed below are a few of them.
Taxation laws are different for limited companies and self employed categories. Whereas a limited company is a separate entity from the directors and shareholders, in the self-employed category, the business and personal money are considered as a single entity for tax purposes.
All limited companies are liable to pay corporation tax on the profits earned on an annual basis and the directors have to pay a tax on the income drawn from the company. If dividends are received by the shareholders, they are liable to pay a dividend tax. Income tax, employees’ NICs and employers’ NICs are to be paid by the employees and company, respectively.
For those who are self employed, they have to pay tax on all the profits generated by them (through the self assessment process). They are also liable to make the weekly (Class 2) and annual NICs in proportion to the profits that are generated (Class 4).
A self employed business owner or one who runs a company should register for VAT in case the annual turnover exceeds an amount of £77,000. A voluntary registration is also allowed.
Administration and Related Costs
Administration formalities demand more from a business owner who runs a limited company than one who is self employed. There are many statutory and financial obligations that the director of a limited company is expected to satisfy.
It is compulsory that a limited company be registered with the Companies House. Any changes made to the company must be duly informed to the registrar of companies. Moreover, an Annual Returns statement accompanied by a copy of the company accounts must be submitted every year. However, most limited company directors engage the services of an accountant to take care of the accounting responsibilities as well as manage communications with the HMRC and Companies House.
For the self employed, the legal hassles are fewer though it is still necessary for them to maintain records accurately and comply with all regulations pertaining to labor laws, safety, discrimination rules, etc. A sole trader also seeks the services of an accountant such as PK Group or bookkeeper to assist in filing returns of the annual self assessment.
The HMRC has to be informed if an individual decides to become self employed. There are no costs involved. To set up a limited company, the costs would be well under £100.
Credibility and Business Structure
For specific professions it is easier to provide services under the limited company banner. This is true when an individual is a consultant or a surveyor. In many a case, it is a contractual requirement.
The liability differs according to the business structure that is in force. In the case of a limited company, the company is held responsible for anything that may have gone wrong; the directors are not implicated. In case frauds have taken place, then the issue is dealt with in a different manner.
In the case of a sole trader business structure, the business owner is held responsible if the business goes into debt or if a client or employee has filed a lawsuit. Creditors can attach your personal assets if you are self employed.
However, this is not possible in the case of a limited company structure. The directors have limited liability in the case of a limited company. This is the reason that this structure is also otherwise named as Limited Liability Company.
The business owner can discuss with an accountant the right business structure to be implemented that would suit his/her requirements and circumstances.