When entering into the world of business, it can be hard to work out how you want to structure your company.
Do you want it to remain small and intimate, running everything through your own name? Or have you got a future dream of having your own team, and achieving real growth?
For some, the sole trader route is an attractive one. If you’re a musician or performer, it may seem like far too much work to register yourself separately as a limited company.
But for many others, they’re simply unaware of the tax advantages that can come with incorporating yourself into a business, even if there is more red tape potentially involved.
Pay less tax
When you don’t have to pay income tax, you’ll immediately realise what you’ve been missing out on by not incorporating your business.
The self-employed pay tax on income above the personal allowance (£12,570 in 2021/22) and either class 2 or class 4 National Insurance contributions (NICs).
Limited companies pay corporation tax on all profits arising in their accounting period, at a lower rate than income tax, and no NICs as long as you pay yourself a small salary.
As long as you pay yourself a small salary, you might not have to pay income tax or NICs. You can pay yourself from your company’s profits via dividends, which also offer lower tax rates than income tax.
When you’re a limited company, you can sell shares in your business.
This can be an advantage if you’re looking to secure funds to help grow your company quickly and efficiently, although you will have shareholders to answer to.
As a sole trader, this is not usually possible which means you might need to source other forms of external funding to achieve the same growth.
Limited liability security
If you incorporate your business from the start, you will benefit from limited liability. This means your home and personal possessions won’t be on the line if the company goes belly up.
Should you find yourself in a legal battle, it will be the company that pays for the damages, not you. None of your personal assets will be seized to pay for the debt.
Contrast this to sole traders, who are personally liable for any debts or financial losses that the business may make.
Sole trader benefits?
As a sole trader, you do get access to a personal allowance, something you won’t find as an incorporated business.
You’re self-employed and can run your own business as an individual, meaning you can keep all of the business profits after they’ve been taxed.
In terms of legwork, there are far fewer admin obligations involved with being self-employed. No company tax returns, annual accounts, or confirmation statements, just self-assessment. To the uninitiated in the world of accounting, this means sole traders generally have a lot less paperwork.
Talk to us about your business
Every person is different, every situation unique, but everything can be discussed with a professional to get the best advice possible.
Get in touch with us today, and we’ll talk about your situation and what is best for you.