It is recommended that you get advice specific to your circumstances when it comes to the decision of your business structure. Transform Accounting can review your circumstances and work out a specific projection for you. The following are some of the aspects which need to be considered.
| Sole Trader | Limited Company | |
|---|---|---|
| Status | Sole trader or partnership. Any financial or business affairs are kept private so that competitors cannot have insight into the success of your business. | Corporate body, regulated by law. Registration and filing requirements. Separate legal entity, capable of entering contracts and owing property. |
| Liability | As a sole trader, you have unlimited liability, which means you are solely accountable for any debts your business may have and the risk is yours if you cannot pay the business debts. In a partnership you are both jointly and severally liable for the debts of the partnership. | Shareholders will have limited liability and are not personally liable for company's debts. Except in cases where personal guarantees have been given, your personal assets will not be used to pay the debts of the company. |
| Taxation of profits | All profits subject to income tax at basic/higher and additional rates. | Profits of the company are subject to corporation tax, at the small profits rate/marginal/main rate. Extracted profits subject to income tax in the hands of the shareholders. Gains on the sale of shares subject to Capital Gains Tax for individual shareholders. |
| National Insurance | Class 2 & 4 at 9% and 2% | Class 1 at 12%/2% employee and 13.8% employer Overall NIC bill is higher |
| Payment of tax | Payments on account 31 January in tax year, 31 July following tax year end. Balance 31 January following tax year end. | Operate PAYE on employment income, payable monthly. Corporation tax payable 9 months + 1 day after accounting period end if not paying tax at the main rate. |
| Pension | Personal pension scheme only | Company can contribute to a personal pension scheme and/or an occupational pension scheme. |
| Losses | Use of losses is more flexible eg. Losses in the first four tax years of trade can be set against total income of the previous three years. | Use of losses is against total profits of the current year and prior year and then carried forward against trading profits only. |
| Disposal of assets | The trader owns the assets so it is a disposal by him which will be taxed at 18%/28% | Disposal of assests owned by the company will be subject to corporation tax. If the funds are then extracted they will be subject to tax again in the hands of the individual shareholder i.e. double taxation charge. |
| Exit Strategy | Disposal of business as a going concern and cease to trade. Disposal of separate assets and cease to trade. Simply cease to trade. |
Sell shares back to company. Sell shares to a third party. Solvent liquidation. Insolvent liquidation. |
| Disposal of business | Disposal of each individual asset for capital gains tax purposes. Entrepreneurs' relief may be available. | Disposal of shares by individual shareholders is subject subject to capital gains tax. Entrepreneurs' relief may be available. |
| Inheritance tax | A transfer of the whole business is eligible for business property relief at 100%. A transfer of an asset used in the business may beeligible for relief 50%/100% |
A transfer of shares in an unquoted trading company will be eligible for business property relief at 100% |