Limited Company vs Sole Trader

one of the key advantages of the corporate form is the unlimited liability of its owners. This is a topic that many people are looking for. star-trek-voyager.net is a channel providing useful information about learning, life, digital marketing and online courses …. it will help you have an overview and solid multi-faceted knowledge . Today, star-trek-voyager.net would like to introduce to you Limited Company vs Sole Trader. Following along are instructions in the video below:

“Guys. It s caroline here from the juniper links counselling channel and today. I m m gonna go through unlimited company versus of sole trader setup. So i ve already them in two versus umbrella and this one s gonna explain the difference between limited and sole trader.

Now. I m not gonna briefly talk about how each one is set up just so you kind of know the structures of them then i m gonna go through the pros and cons of each one so you can decide for yourself. Which one fits best for your own circumstances and i ll also go through some practical examples of how the taxes work with each option so again all of this information will help you come to a decision at the end of wow limited works best for me i m gonna go with that or i m gonna stick with sole trader. So let s get started.

I m just gonna jump into my computer here in a second so we can actually see what s going on between the two so in this little presentation. I ve put together for you guys we re gonna go through limited company versus sole trader. So what is a limited company. It is a private company so it s not gonna be listed on like a stock exchange or anything like that it s basically your own little bubble company that you run internally.

Then it s normally limited by shares or the amount invested. There are there ways to limit it. But this is the most common and what this means is when you setup. The company initially often you ll just have a one pound share especially if you re the only owner of the company and that money is basically if the company goes bust.

And it can t pay anything basically and it needs to shut down. You ve lost one pound and that s it obviously this is very useful. And i ll get into that in a minute. So owners can receive profit after tax in the form of dividends.

This makes it very tax efficient and you also have separate legal entities. So you re not personally liable for debt unless. There is a clear negligence by the director and what is the sole trader. So it s a single self employed person running a business.

It s very simple reverse shares there s no limit of liability. And there s no separation. So basically if the company has debt. It s your personal debt as so you re personally liable for things.

All the company profits also treated as your personal income. So there s no separation. It s just you are the business or self anything happens. It s personal tax basically sole trader pros so first of all it s easy to start.

Although you do have to notify hmrc when you start trading. The accounts are really simple to complete you don t have to submit anything to the companies how to do that and the only legal filing requirement each year is your self assessment. Obviously there are certain rules that you need to follow just like with limited companies in terms of what expenses are allowable and so on. But these are normally more simplified and easy to understand.

And it can be tax efficient with low profits basically. There s not going to be a huge benefit in you opening a limited company compared to sole trader. If your profit solo. But there are other advantages.

I will get into here in a second sole trader cons. So there s no legal separation between you and the company again company debt is your debt. So. If you mess up the company.

You re also just screwed basically. You re gonna have to pay for that assets are not protected again..


Because there s no separation personal liability for debts all company income is treated as your income. So it s not very flexible at all in terms of what you can take from the business. So if you re turning over a lot and your profit is high you re forced to take all that income whether you want to or not with a company who have the option it can stay in the company and you can take it you can take over much you want when you feel like so the higher your profit. The less tax efficient.

It becomes which we ll see here in a minute as well limits company cons more complex legal requirements for accounts and returns. But these are problems they re easily affect with an accountant directors responsibility to ensure company tax is paid on time so again this is where the whole negligence thing comes into play. If you re obviously making bad choices. Where your company can t pay its tax as the director such as taking well taking dividends when you shouldn t.

Which is considered a from the company and that s preventing your company from paying tax and then your company needs to get shut down. Because it can t pay its tax hmrc could potentially chase you personally because of negligence. So you just got to be careful. They re set money aside for personal tax.

More discipline required so i mean yes. It is a con. But also as a sole trader you often will have a tax bill as well unless you re doing something like c. Is for your taxes already deducted.

So you don t have to worry about it that kind of thing so yeah. But again accountant will fix this stuff for you because you can predict what tax will be disclosed company information in the public register. So yes there are certain details displayed on the public register for anyone to look up basically with your company. Name and number.

So the first things. First is the registered office address. You can use a service to keep your personal address off the public record. And yes.

You will need to submit accounts to companies house and they those will be displayed for my three companies. We only need to submit a balance sheet. So that s a very limited information that someone could actually see about your company. Which is not a big deal at all for most people and you need to pay for an accountant oftentimes.

We need to pay for one with sole trader as well. But the fees are normally cheaper. Because again legal requirements are much lower at the same time having an accountant or ultimately it ll make your life way easier and prevent costly mistakes. So it s kind of like a con and a pro at the same time there is a company pros you can get tax efficient pay through salary and dividends you can be flexible with how you pay yourself so for example.

If you re happy with the amount you ve taken from the company. You really don t need that much income you d rather leave the funds in the company to invest in something else such as you could pay money into your own personal pension scheme or a private pension scheme. Your company can do that with tax relief. You can also choose to invest the money elsewhere and keep the money circulating within the business rather than was drawing.

It and paying the personal tax on it then if the company is a separate legal entity. So there s separation of company and personal debt. Again. You ve only got the one pound share in there.

That s what you live. If the company gets closed down. You have more credibility with clients. So it s like an actual company incorporated on companies house.

They ll see you ve got more responsibilities to take care of you re actually taking it seriously that sort of thing you could ask for higher pay. As well you have protection of your company..


Name so because it s already registered on companies house. No one else can take your name if it s a big deal for you you want it to be like an international brands just check in some other places to make sure. It hasn t already been taken. But in the uk.

It will be protected as its own company name you ve got the ability to add shareholders for funding. They will obviously benefit from that investment because you ll have to pay them dividends based on how the shares have been set up they will also have voting rights in your companies. So you ll just have to be a bit careful with who you let into the company because they essentially own. It now so anytime you want to keep full control over your own company never give more than 50 of your shares away you always want to have 51 of course if you re a husband and wife company and you have no problems.

Letting the share is 50 50. That s fine. So each of you can have one pound share in the company and then you have an asset that can be sold later if you wish you could potentially do this with sole trader. But is gonna be much harder.

Because there s no separate legal wrapping around the sole trader. It s basically you as the person. An individual trading so with the company you ve got a physical asset. You can actually sell to someone and they can take over it so these are some big prayers of a limited company now in the next page.

You ll see basically income and profit. Comparison for the 2019 20 tax here on the left. We ve got sole trader here. You won t see a huge tax benefits with this amount of pay and essentially i d recommend setting up a limited company if your sole trader income.

So the profit your company s making as a sole trader is 15 to 20 thousand pounds a year you can do it with less of course as long as happy to do the accountancy side. So for example. Accountancy fees are always higher with a limits company. However.

If you want to benefit from having the separate legal entity from protecting your assets from having the company name saved and all of those things you can set up a company from day one. And it s not problem as long as you do the company accounts because they will companies house will shut your company down. If you don t do your confirmation statements and company accounts. I wouldn t recommend starting with them.

It s a company. If you re not prepared to pay out for an accountant is the only thing. I d say so on 120 per day pay or about 30k turnover. And that s good with that so i m basing this on fully working here of two hundred and forty days and also the fact that you have recently set up flat rate that scheme.

And you re a limited cost trader. So your costs are not high enough to have your actual flat rate percentage instead. It s the basic rate. Fifteen point five percent in the first year.

So you have the flat rate vat gain. Here. And you ve also got the same expenses going through so like the phone travel supplies. All the same apart from accountancy fees.

Which is again because of the limited company they are higher. And you ve also got use of home allowance. Which is a special allowance for limited company directors and then you ve got salary here. So your salary is an allowable expense for the company.

And this is a ballpark figure of the salary in twenty nineteen. Twenty..


That is most tax efficient for single directors. But of course. If you add your wife on to the company. And she s working for as well you immediately can start running both of yourselves higher salary than this sole trader.

You can t do that you d have to set up a partnership and it becomes a bit complicated and honestly once you start getting into partnership territory. You might as well go a limited. So we ve got the profit figures for both of them here. Twenty six thousand four hundred for the sole trader and sixteen nine hundred for the limited so these are the class two and for national in sure you need to pay personal tax take home pay is 21900 here.

You ve got the profit figure for the company. Which is essentially what s available as dividends. You ve got these salary as well. Which you took from the company.

And you ve got the 216 years of home. I m including this as income because you would have spent two either way so you re extracting this extra money from the company essentially for free and then you ve got personal tax year on the dividends. And what s left is 21. 984 and the sole trader has 21 900.

So it s only about 100 pounds difference for the year not huge tax savings. But keep in mind. The accountants fees are a lot higher and also the tax figure is a lot lower. It s almost exactly the amount of the accountancy fees have been greased by again the limits company gives you other benefits than just a bit extra profit.

It gives you that protection. You want for your finances example. Two so here. We ve got a bit of a ridiculous example.

Because no sole trader would be well they could definitely turn over this amount. But if they re making this much profit like a hundred and five thousand profit. It would be not very smart to continue as a sole trader and you ll basically see why here in a minute not in a minute you can see on the screen right now so again taxes and national insurances and you re left with about forty thousand nine hundred limits. A company is all the same expenses again.

Accountants fees are a bit higher the accountancy fees here are higher. Because this would be a more complex case for sole trader work regardless. It s got way more money going through it and i ve also included a pension contribution in this case of forty thousand pounds. Which is your maximum allowance per tax year and this pension contribution saved both examples a lot of tax money which i won t go into just now because it is a bit complicated but trust me.

When i say a lot of tax money was saved with this forty thousand contribution. It essentially raises your lower rate tax thresholds. So you don t pay higher rate taxes until way later the company get full corporation tax relief on that contribution so again you ve got the salary you ve got the dividends. You ve got the use of home allowance and finally you ve got your take home pay of fifty thousand four hundred and eighty pounds and on the sole trader side.

You ve got the profit tax. Again take home pay of forty thousand nine hundred pension contribution here has been deducted because you paid for that personally that is no longer your take home pay so nine almost ten thousand pounds less tax going through limited. Which is always nice and almost ten thousand pounds more income. So as you can see these are even now a lot more because you can t fees are more similar.

But once you start getting into these higher earnings thresholds. The limits company really wins. Because you don t have to take all of these dividends here you could choose to take thirty thousand in dividends and save yourself quite a bit of tax money by doing that so what you see here is like a separation. Where you can choose to keep the money in the company rather than taking it all out as income and just getting taxed ridiculous amounts.

So when it works for a limited company you take action and set up a company well that s not too different to actually notifying hmrc of your trading. If you go with an accountant such as our accountancy services will do the limits company set up for free as part of our monthly service use accounting software for expenses banking invoicing..


Very easy to do this and i ll save loads of hassle and doing our accounts and things like that so this is kind of mandatory really for them it s companies you don t want to be messing around with these things and obviously definitely keep track of expenses because they always reduce your corporation tax as long as they re allowable of course. You can t just put anything in there what i but fortunately. It will let you know if there s a problem so budgeting for quarterly dividends. Yes hmrc prefer that you take out quarterly dividends.

But you do have the option to take monthly just make sure that when you do take the dividends they re separated from your salary each month. So hmrc doesn t just decide that all of the income be receiving from the company should be taxed the salary that s not a good scenario to be and finally again an accountant s help with drawings advice payroll legal filing all that stuff basically all the difficult things to do with limited companies when you compared to sole trader. An accountant will help massively and all you have to worry about is updating software. When it doesn t work so you take it all the money from the business account leaving none for tax.

This is a huge problem because again this could be considered negligence by hmrc and they ll chase you personally. Which is no different to a sole trader. So make sure you don t do that you don t keep track of your expenses and save receipts this makes it far less tax efficient. But it would essentially be the same with a sole trader.

If you didn t do that you just get taxed on all of your income regardless and nothing to reduce your tax bill you don t stay in touch with your accountant. Obviously this can create many problems and your income is too low yes if you can t afford. The accountant. It s probably not a good idea to go ahead and set up the minutes of company.

And just because you are going to need the accounts to be done so 15000 again like i said. 15 to 20 k. Profit as a sole trader at this point. It s definitely worth switching your business to a limited company.

Because you are starting to make some money and you want to protect that money more security for your finances. All the hassles taken away with a good accountant and you get to pick when and how to take money out of your business. So again you get the flexibility you also get protection. There s really no reason not to switch at this point.

And the choice is yours so would you pick a limited company or would you pick sole trader. So you want to protect your business and save money or you want to keep things simple. But pay more tax and it s really not that simple as a sole trader to be honest. Because you will have to still keep track of your invoices.

Keep track of your expenses and essentially you will likely have a business account that you want to look through to do these things at the end of the day. It s the same with a linens company. If you have a good accountant. That s the only difference.

But just as it is if you can pay an accountant. Then set up the limits company it s overall better. But of course you are a free being and you can choose whatever you want it s not my business. I m just telling you there is a better option thanks so much for sticking to the end of this video and watching my sole trader vs limited comparison if you did have any questions feel free to leave them in the comments down below.

And we ll get back to you as soon as we can otherwise you can visit our website wwwe can t figure out how that spelled then and finally hopefully. We helped you answer the question of whether a linux company or a sole trader is better for your personal circumstances. Don t hesitate to hit that subscribe button. If you re interested in more accounting video help because we will be posting on here regularly and also go ahead and click that like button.

If you found this helpful thanks a lot for watching again ” ..

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