Your business Structure
The two most common trading options are limited company and sole trader.
Which is most suitable for you? There are tax and NI implications but there are other implications too.
Here are some of the factors that should be considered.
As a limited company is it possible to include a spouse or partner or child or parent? Either as a director or a shareholder or both? What are the earnings/ tax rates of that spouse or partner? Sometimes an adult child can act as a director and be remunerated for them acting as a director – even if their actual contribution is minimal.
As a limited company you are not able to make a generous deduction for working from home. A sole trader has more generous deductions.
Accountancy and other fees can be higher with a limited company.
A sole trader may not wish to be personally financially exposed and may wish to benefit from the “veil of incorporation” as a limited company.
A limited company must, ordinarily, set up a bank account in the company name.
Drawings from a limited company are taxed. Drawings from a sole trader business account will not be taxed (as they have already been taxed).
Limited company profits are not subject to National Insurance. At the time of writing the sold trader National Insurance rate on profits is 9% and may well increase to 11% (as was attempted in an earlier budget)
Sole trader profits may be subject to tax at 40% (or higher) whereas limited company profits suffer tax at 19%. This may reduce to 17% in 2020. Sole traders earning just over £100k lose their personal allowance on a sliding scale and are subject to a 60% tax rate.
Dividends taken from a company are taxed at 0% (first £2k) then 7.5% then 32.5%. A company owner may not need to extract large dividends and can reduce them to keep their personal tax down.
As a limited company you may be taken more seriously by your potential customers. Opening and closing a limited company takes more time and money than a sole trader and may attract a more serious and committed customer base. Once your company has been running for some time the customer can view your longevity easily by visiting Companies House.
Please come and chat to us about the most suitable trading structure for you.