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Should I set up a Limited Company or stay as a sole trader

I get asked many times by people setting up in business do I need to set up a Limited Company to trade through.

The answer is no you do not NEED to set up a Limited Company in the UK to trade. It is really easy to just trade as a sole trader.

However, you need to understand that you are trading in your own name and are personally responsible for all aspects of your business, including its debts and liabilities. Sole traders are not separate from their business, so their personal assets are at risk if the business runs into financial difficulties.

This is the MAIN difference sole traders are personally financially liable if they are sued for example.

On the other hand, a limited company is a separate legal entity from its owners or shareholders. The company has its own finances and is responsible for its debts and liabilities. Shareholders are only responsible for the amount of money they have invested as share capital in the company and their personal assets are generally protected if the business runs into financial difficulties.

So generally from a financial point of view a Limited Company offers you far more financial protection as in most circumstances as your personal assets are not at risk.

Limited companies are required to register with Companies House and must follow certain legal and regulatory requirements, including filing annual accounts and tax returns. Sole traders do not have to register with Companies House, but they must still register for tax purposes and file self-assessment tax returns.

The administration is more onerous running a Limited Company than as a sole trader.

The taxation of both structures is also different but generally there is more scope for tax planning in Limited Companies than as a sole trader where all you income in any year is taxed as ‘income tax’ so if you are a higher rate taxpayer you will suffer the the higher rates of income tax.

Companies are currently taxed at 19% (soon to rise to 25% for companies with profits over £300K – and a marginal rate between £50K to £300K). 

For owner managed business the owner usually take their money via a salary and dividends from the business but as long as they pay themselves less than the higher rate income tax thresholds, they can avoid the higher rates of income tax.

There are advantages and disadvantages to both business structures, and the choice between being a sole trader or a limited company will depend on the individual circumstances and needs of the business owner. It is advisable to consult a professional to decide which fits your needs.

Disclaimer:

Paul Stankiewicz is the owner and principal at Paul Marks & Co Chartered Accountants which is the trading name of Paul Marks Ltd a Limited Company registered in England and Wales (registered number 4487645).This article is designed for the information of readers only and is the opinion of the author only. Readers should not act on any of the information contained in this article without seeking professional advice. Nothing in this article constitutes advice, nor does the transmission, downloading or sending of any information or the Material create any contractual relationship. Links to third party websites are provided as a convenience to the reader, Paul Marks Ltd does not control and is not responsible for any of those websites or their content. Paul Stankiewicz and Paul Marks Ltd accepts no liability or responsibility whatsoever for any loss or damage suffered by any user of the information contained on or accessed through this article or the Material downloaded.