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BUSINESS ADVICE •  24 OCTOBER 2022 • 3 MIN READ

Should you class your business as a sole trader or a company?

the bottom of a left shoe

You’ve got some thinking to do. Evaluate the pros and cons of each of these business structure types and the right path should make itself clear.

In this blog, we'll cover:

  • The pros and cons of a sole trader business structure
  • The pros and cons of a company structure
  • Changes in business structure

Sole Trader

A sole trader is a person trading on their own. People who opt for this business type can usually get started without any formal or legal processes.

Pros

  • Quick and cheap (you can start trading with your own name and your personal UTR number)
  • You are personally entitled to all profits
  • You’re able to employ others to help run the business 
  • You control, manage, and own the business

Cons

  • You’re personally liable for business taxes, business debt, and any claims made against you. In some situations, even your home can be placed at risk
  • Profit can’t be split for tax purposes. If you earn a reasonable amount, the highest tax rates will apply
  • It may be more difficult to raise financing for your business
  • As you start earning higher profits this structure becomes less tax efficient
Charlotte

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Company

Company is the most frequently chose business structure. Registering as a company turns your business into a separate legal entity. Amongst the benefits, one stands out: the business assumes ownership of assets and responsibility for debt.

Pros

  • Your business gets a more commercial look and feel (it’s perceived as a sign that you can be trusted to be here for the long-term)
  • You get a degree of tax flexibility*, with the option of retaining profits in the company or paying them out to shareholders
  • Your personal liability is restricted, which gives business owners some protection from creditors and other claims
  • Shareholders’ liability for losses is limited to the value of their shares in the company
  • Depending on the method of profit extraction from the company, companies are generally more tax-efficient 

Cons

  • Incorporation costs money (you’re able to do it yourself on the Companies House website for £12, or we can take the entire hassle out of your hands for £95 + VAT)
  • Your company must produce annual financial statements and file its own tax return. All of our packages cover you for the financial statements and up to three tax returns (no matter if you’re a sole trader or trading as a company)
  • The limited personal liability of shareholders doesn’t extend to directors. If you, as a director, fail to carry out your statutory duties (they’re set in the Companies Act 2006), you may be personally sued for breach of duty
  • The company must file an Annual Return with Companies House each year (different from a tax return to HMRC). Your Annual Return and its £13 filing fee is included in almost all of our pricing
  • Companies House and HMRC have strict procedures for companies to cease operations. These include cancelling VAT and PAYE registrations, distributing company assets (which may have VAT and tax implications), preparing final financial statements, as well as additional shareholder and director resolutions

* The exception is if the ‘off-payroll working’, or IR35, rules apply. These rules apply if the worker (often a contractor) provides their services through their own limited company or another type of intermediary to the client and who would have been an employee if they were providing their services directly to the client.

Changes in business structure

There’s a new twist to be aware of from 1 April 2021. A top tax tier is being introduced for individuals – taxing any earnings over $180,000 at 39%.

Because the company tax rate will remain at 28%, it may be tempting to reduce your income tax by moving from a sole trader to a company. However, Inland Revenue may well consider this tax evasion if you have no other reasons for changing your business structure.

Who are Beany?

We’re an online accounting firm that is always right here for you, your accounting pain relief. The most advanced technology lets us work way more closely with you than a normal accountant would. 

We have a dedicated team of remote accountants to take care of your business no matter where you are, so you can focus on growing your business. We take out the ‘fluff’, break down the barriers and get things done. Looking out for you is what we are all about. Get started for free today.  

Charlotte

Charlotte Wass

General Manager, Beany UK

Chartered Accountant and Chartered Tax Adviser based in London. I love autumn, otters and Malteasers, and I hate spiders, peanut butter and the London Underground.

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