Sole trader or limited company? Choosing the right structure

One of the first decisions you make when starting a business is how to structure it. There is no single right answer, but the choice affects your tax bill, your personal risk and the paperwork involved.

Sole trader

Being a sole trader is the simplest way to start. You register for Self Assessment, keep records and pay Income Tax and National Insurance on your profits.

• Pros: simple to set up, minimal administration, complete privacy over your accounts.
• Cons: no legal separation between you and the business, so you are personally liable for its debts. As profits grow, the tax can be higher than through a company.

Limited company

A limited company is a separate legal entity. It pays Corporation Tax on its profits, and you take money out as salary, dividends or both.

• Pros: limited liability, more flexibility over how and when you take income, and often more credibility with larger customers and lenders.
• Cons: more administration, including annual accounts, a confirmation statement and a Corporation Tax return. Your accounts are also publicly available at Companies House.

How is a company taxed?

Corporation Tax is charged at 19% on profits up to £50,000 and 25% on profits over £250,000, with marginal relief in between. Getting the balance of salary and dividends right is where good advice pays for itself.

Partnerships and LLPs

If you are going into business with others, a partnership or limited liability partnership (LLP) may suit. An LLP gives members limited liability while keeping the tax treatment of a partnership.

Which is right for you?

It depends on your expected profits, your appetite for risk, your plans for growth and your personal circumstances. You can also start as a sole trader and incorporate later.

We will compare the options with your own numbers, explain the tax difference and handle the registrations for you. Get in touch for a free initial conversation.