Starting up as a sole trader is without doubt the simplest way to start a business in the UK. All you need to do is inform HMRC that you are working as self-employed, and report your business activities through the annual self assessment tax return.
Setting up in business as a LTD involves a more complex formation process, and the financial and administrative responsibilities of running a LTD are certainly greater than those of a ST.
However, there are many benefits a LTD has over ST. Here are 10 key advantages you should bear in mind when deciding what business structure to use for your venture.
1. LEGAL ENTITY
ST and his/her business is treated as a single entity for tax and administrative purposes.
LTD is a legal entity in its own right. This means that everything from the company bank account, to the ownership of assets relates to the business. They are totally separate from the interest of the directors and shareholders.
2. LIMITED LIABILITY
If you run a LTD you are protected should things go wrong. Assuming all rules have been followed, as a director you will not be personally liable for any financial losses made by your business.
Those running a business as ST do not enjoy such protection from financial claims if things go wrong with their business. You are personally responsible for any losses your business makes.
3. SHAREHOLDERS AND SUCCESSION
As the sole shareholder in your business, you own the business. However, a LTD can issue various classes of shares. This means you can easily sell or transfer ownership of shares.
If a shareholder wishes to retire, sell his shareholding, or dies, it is far easier to transfer ownership of a LTD than a non-registered business structure. When you die the company lives on: it is a separate legal entity.
4. NAME PROTECTION
Once you have registered your company, your company name is protected by law. Companies House has very stringent rules for the naming of companies so no one else can use the same name as you, or anything deemed too similar.
As a ST, it’s possible someone else could trade under the same name as you, and you couldn't do anything about it unless you registered a trade mark.
5. STATUS AND PROFESSIONALISM
If you plan to do business with larger companies, it can help if you are working via a LTD as it gives off a more secure status and professional image. In some industries, it may even be a mandatory requirement as they will not deal with ST.
Funding can be difficult for all types of businesses in the current climate. But because a LTD is a distinct entity from its owners it may be a little easier for a company to secure business finance than it is for their ST counterparts.
7. BUSINESS EXPENSES
Another major advantage there are some expenses which can be claim by the company only which of course will minimise corporation tax. For example:
- As a company director you can have a salary.
- The company obtains full expenses and capital allowances on transport or vehicles.
- If the contract is in the company’s name, mobile phones can be provided to employees and it's tax free.
- Many different benefits and employment incentives can be provided free of tax.
- As a director you may set up a licence between you and your company to rent an office (or other space) in your home.
As a self-employed you can only claim allowable expenses and you need to identify a proportion of an expense that relates to the business.
8. BUSINESS TAX
LTD profits are subject to Corporation Tax, which is 19% from April 2017. The Government has stated it’s intention to cut Corporation Tax to 17% by 2020.
LTD has an advantage to optimise tax as some expenses and tax reliefs can be claim by the company only.
As a ST, you usually pay Income Tax and NIC, depending on your profit.
9. INCOME TAX
The main advantage of running your business as LTD is that you are likely to pay less personal tax than a ST.
If you are the director and shareholder of a LTD, you may choose to take a small salary and draw most of your income in the form of dividends, which enables you to manage your own tax liability and potentially save on National Insurance costs.
Company schemes may be far more generous in terms of benefits and limits than Personal Pension. A LTD can fund its employees’ executive pensions as a legitimate business expense. This can offer a tax advantage over those who are running their business as ST.
A ST can only have a Personal Pension.
Remember, that choosing the right business structure is crucial and if you are not sure which is business model works the best for you, speak to our business consultant now.