When you are starting a business, there are so many questions that you will need to answer. Who are you going to market to? What is it that you are selling? How much profit do you need to make to stay afloat?

One question that is often overlooked is “Should you be a sole trader or set up your own limited company?” In this article, Maple Accounting will explain which the best option for your business is.

Self-employed – Pros

Establishing yourself as a sole trader can be done in a day. The process is quick, easy, and free. HMRC can acknowledge you as a new sole trader in as little as 24 hours and everything can be done through their website here.

When you are self-employed, accounting is also a very simple process. One of the main reasons that bookkeeping is so straightforward for sole traders is because all of the money that you earn is yours (apart from the taxman’s cut, obviously).

Self-employed – Cons

Legally, you and your business are the same entity. Any debts that your business accumulates are in fact your debts.

Some companies won’t do business with you unless you’re a limited company. Sole traders can unfairly be seen as unreliable, amateur, or as not well established in their industry. Of course, in reality, this is not the case but you should be aware that some doors might not be open to you if you choose to go down the self-employed route.

Limited company – Pros

You will generally pay lower tax overall if you incorporate. This is because corporation tax and dividend tax are lower than income tax and National Insurance contributions. It is worth mentioning that, unless you earn more than £30,000, you’ll be unlikely to save money overall through forming a limited company when additional accounting and other costs are added in.

Private limited companies can sell a share of their company to raise money to fund their business. You’ll be restricted to selling your shares to family members, friends and business partners.

If you want to put your company on the stock market, then you would have to form a public limited company, which is a different kettle of fish we’ll consider in a later article.

Limited company – Cons

Because you and your business are two separate legal entities, your accounting requirements are more complex. Whereas a sole trader only has his or her own self assessment to think about, a limited company director has self assessment and corporation tax, both of which needed to be treated different for tax and accounting purposes.

We would strongly recommend hiring an accountant. They will give you advice on how to save the most money and how to help you through any processes that might be new or unfamiliar to you connected with your company’s finances.

Which is right for you?

If you earn more than £30,000 then we would recommend setting up a limited company to capitalise on all of the tax benefits that are available to you. However, if the amount you take out in wages is smaller then starting out as a sole trader may be the better option. You can always incorporate later.

We can help

If you are not sure what the best business structure for you is a sole trader or as a limited company, contact our team.

For further information, email us at success@maple.uk.com or call our head office on 01332 207 336.