openPR Logo
Press release

Sole Trader vs Ltd Company

One of the decisions new businesses often face is whether to operate as a sole trader, partnership or limited company. Most small business owners choose the sole trader or partnership route at least to begin with, because it’s the easier option, and perhaps because incorporation is associated with larger organisations with multiple directors and investors.

Whilst it is certainly true that choosing the sole trader option is likely to be the easiest and most cost effective option to begin with, there are longer term benefits to incorporation which apply to businesses of all sizes. Furthermore, company formation is a fairly straightforward process. There need only be one or two directors/shareholders, and there are just a few statutory laws to consider.

The chief benefits of incorporation as as follows:-

1. Tax savings

Precisely how much tax is saved by incorporating depends very much on how much profit the business makes and, to some extent, how much of this profit is taken as drawings by the business owner(s). For profits of £10,000 or less, your tax liability will be minimal irrespective of your legal structure, but for larger profits the savings can be significant. A sole trader paying standard rate tax will pay income tax of 20% and Class 4 NI of 9% on all profits above their personal allowance (currently just over £7,000 per year), as well as paying Class 2 NI of £2.50 per week. As a limited company, the rate of tax is 20% but with no NI payable.

For example, suppose your business makes £40,000 per year. As a sole trader you pay 20% tax on all income above the personal allowance:

(40000 – 7475) x 20% = £6505

Then there is the National Insurance:

Class 2 NI (2.50 x 52) = £130
Class 4 NI (40000 – 7225) x 9% = £2949.75

So your total tax and NI bill for the year is £9584.75 as a sole trader.

As a limited company, you can pay yourself a notional salary of £7475 per year. This uses up your personal allowance (and is therefore tax free) and reduces the company profits accordingly. The remainder is taxed at the small companies rate:

(40000 – 7475) x 20% = £6505

And that’s it – there is no personal tax or NI so you save just over £3,000 per year in tax. You also get longer to pay. Corporation tax is due 9 months after the year end, whereas income tax is payable on account in six-monthly instalments in January and July each year.

For earnings of more than about £43,000 it becomes a little more complex as we are into higher rate territory but the tax savings are still significant, and for these levels of income you would want to think about incorporating anyway given the size of the organisation.

2. Limited liability

As a sole trader you are your business, so in the event of financial difficulties, your own personal assets could be at risk. A limited company is a separate legal entity which means that you are not personally liable for the debts of the company, and personal assets such as your home will not be at risk in the event of finanial trouble. It’s important to note, however, that the directors do have legal obligations to ensure that the company’s finances are in good order. Furthermore banks will often ask for a personal guarantee before lending you money, meaning that company debts may well still be secured on your own home or other personal assets.

3. Professional image

Your business may be more attractive to potential customers as a limited company, as it makes your organisation appear larger and more established.

There are a few disadvantages to incorporating:-

1. Extra laws and paperwork

As a limited company you must file an annual return and statory accounts at Companies House each year. You must also display your company name and number on all of your stationery, website etc.

2. Higher costs

These are usually more than offset by the tax savings, but accountant’s fees are generally higher, and there is the cost of forming the company and filing an annual return each year.

3. Separate legal structure

Because the company is a separate legal entity in its own right, the transfer of money and assets in and out of the company has to be accounted for properly. Borrowing money from your own company can have severe tax implications, and transferring of property and other assets out of a company can potentially land you with a sizeable capital gains tax bill.

Nevertheless, incorporation is usually beneficial for businesses making more than about £15,000 to £20,000 profit per annum.

N S bookkeeping & Accountancy provide bookkeeping and accountancy services to small businesses in the North East of England. Our website includes more info about ourselves, plus free news, info and blogs, please visit

3 Moor Park Road
North Shields
Tyne & Wear
NE29 8RY

This release was published on openPR.

Permanent link to this press release:

Please set a link in the press area of your homepage to this press release on openPR. openPR disclaims liability for any content contained in this release.

You can edit or delete your press release Sole Trader vs Ltd Company here

News-ID: 206805 • Views: 958

More Releases from N S Bookkeeping & Accountancy

HMRC Phishing Emails
HMRC have reported an increase in the number of ‘phishing’ emails in recent months. These are emails from scammers who disguise themselves as HMRC, often telling the recipient that they are due a tax refund. Typically the message will include a link to a site that looks like a genuine HMRC webpage, but in reality is a bogus site designed to trick you into providing personal details such as HMRC

More Releases for Class

The AIRETOS E95 Class
The VoxMicro Group is proud to present its AIRETOS® branded E95 Class modules; a reliable, long-lifespan family of wireless adapters that transform the entire Qualcomm-Atheros QCA95xx/AR95xx series of client chipsets into a full portfolio of modular solutions. The E95 Class comprises a total of 14 base models. The AIRETOS® E95 Class supports high-end wireless link configurations that can use a full range of enterprise level protocol features, like CCX and FIPS-loopback
Take My Online Class Offers 100% Guaranteed Class-Help Services
New York, NY March 18, 2016 - America’s best online class help experts not only promise to complete all course related assignments on time, but also help to negotiate the lowest rate possible. Take My Online Class offers academic assistance service through their OCPs or Online Class Provider. “When you hire one of our OCPs for class-help, we hold your payments in escrow until you are happy with the service provided.
@WashULaw Welcomes Inaugural Class
The inaugural class of foreign attorneys in Washington University School of Law’s new online Master of Laws (LLM) in U.S. Law Program, @WashULaw, represents seven countries and a variety of professional backgrounds. The 10 attorneys are benefiting from the program’s cutting-edge, web-based format, which allows them to earn their degree from a prestigious world-class research institution without relocating to the United States. The online students hail from Brazil, China, India,
New energy class industrial pump announced
For Immediate Release: 9/20/2010 : GSE announces R-SBP100 Clean energy 100 GPM Traffic powered "Bump Pump" :No Fuel Required US based GSE, Gravitational Systems Engineering, announces a rugged traffic powered pump, which can be easily deployed and requires no fuel. The R-SBP100 is an entry level product designed for use by road construction crews. The 100 GPM capacity and the rugged construction, from recycled tires, make this unit
Mega: Drettmann reaches the 50 m class
Following its successful launch of the PREMIER 130’ at the beginning of the year, DRETTMANN GmbH has now commissioned the construction of its first 50 meter yacht. Yacht architect and Florida resident JC ESPINOSA will be responsible for the design. The new flagship will be equipped with 2,680 HP Caterpillar motors (optionally, MTU engines are also possible) for maximum speeds of 20 knots. On three decks, a total of ten
The EPC Class Structure
Toronto, ON, July, 2006 - The EPC Tag Class Structure is often misunderstood. 'Class' is not the same as 'Generation'. Class describes a tags basic functionality for example whether it has memory or a battery. Generation refers to a tag specification's major release or ver-sion number. The full name for what is popularly called EPC Generation 2 is actually EPC Class 1 Generation 2, indicating that the specification refers to