Which path should you choose? Of all the topics and information we’ve covered so far in this series, this might be one of the most difficult questions to answer.
Before getting started it should be noted that we would always recommend speaking to a professional advisor to ensure that you fully understand your available options and what each path could mean for you.
What’s the difference?
Sole traders: Taxed on their profits at income tax rates. These rates can rise up to a 45% tax rate on income over £150,000. Income tax is charged regardless of whether the profits are withdrawn or retained in the business.
Incorporated businesses: Taxed at corporation tax rates. As of April 2017 the rate of corporation tax is fixed at 19%. If the business chooses to retain profits within the business then these profits will not be subject to an additional tax charge.
Let’s look at the following example:
You are a director/shareholder of ABC Ltd. The company made profits of £60,000 before you took your recommended salary of just over £8,000. Here is a side by side simple comparison of how your finances would look.
This is obviously a very simple view of the possible figures as, for example, there would be tax to pay on any dividends taken from the limited company etc. Despite this fact it is clear to see that, from a tax point of view, there is a major benefit to running a successful and profitable business inside of a limited company structure.
So is the answer the same for everyone?
Unfortunately this is only looking into the situation from a tax point of view and doesn’t take into account the myriad reasons to consider before making your decision. You may also need to consider:
- Additional professional costs of running a company.
- Compliance with Company Law as a limited company.
- Risks of unlimited liability as a sole trader compared to liability only up to the amount of share capital invested as a limited company.
- Differing borrowing potential.
- Simplicity of accounts for a sole trader against those of a limited company.
- Ease of exit. Ceasing trading versus winding up a company.
- Accountancy and legal fees involved, and many more.
The list can continue like this for some time.
If you’re struggling to decide what is right for you then Moulds & Co Accountants are here to help.