Sole Trader or Limited Company

A question I often get asked is which way should I go Sole Trader/Partnership V Limited company and there is no right and wrong answer.

Both sole trader and partnerships are unincorporated, so the business information is not held in the public domain. Limited companies have the business information on Companies House, and anyone can view it.

Partnership is 2 or people in business together with a view to making a profit.

Statutory Filing

There are legal obligations on both sole trader/partnerships and limited companies, and they are all different.

Sole traders only have their tax return to submit annually to HM Revenue & Revenue & Customs.

Partnerships have each partner’s tax return plus one for partnership to submit to HM Revenue & Customs annually.

Limited Companies have their:

Financial statements to submit to Companies House annually.

Financial statements and company tax return to submit HM Revenue & Customs annually.

Confirmation Statement to submit to Companies House annually.

All filings either sole traders/partnerships or limited companies there is late filing penalties for late submissions. Please beware that partnerships get a late filing penalty for the partnership and each partner so these can mount up quickly.

Making a Loss

If your business makes a loss whichever way you decide to trade, there is different treatment of the losses.

Limited Companies- in the first year of trading you can only carry the loss forward and offset this against the first profit until the losses are used up.

If this is not your first-year trading, then you have the option to carry the loss forward (as above) or carry it back and offset the loss against a profitable year and get a tax refund on the loss for that year.

Sole traders/Partnerships have the same options as above, but there are also further options as then loss will show on your tax return, and you have the option to:

  • Offset the loss against any capital gain for the year.
  • Offset the loss against other income e.g. if you have employment income and get a rebate of tax paid through your employment.

Paying Wages/Dividends

Sole Traders has the simplest way of paying themselves as they are in sole charge, and they can pay themselves when they need to as they are taxed on their profits not what they pay themselves.

Partnerships pays each partner a salary (not the same as employment) and then after this it is paid through their partner current account and then at the end of the year their share of profits are allocated to each account bending on the profit ratio split.

Limited Companies will pay their team by a payroll scheme (Pay as You Earn) have the tax and national insurance deducted and receive their net pay.

If you are a director shareholder you will also receive dividends and these are paid out quarterly, six monthly or annually. If you are paying dividends there must be retained profit (profit after tax) left in the company.

Tax Rates

Sole trader and Partnerships 20%,40% or 45%

Limited Companies     19% or 25%

Although limited companies pay tax at a lower rate, directors/shareholders may have extra tax to pay on their dividends in their self-assessment tax return so you have to look at the whole picture.

If you need help or want more information on VAT registration, please contact us:

Call 07795 425032

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