I have set out below a useful analysis of the key differences between Limited Companies and Sole Traders. If you are thinking about incorporating, please contact us as we have a half-price offer on setting up new limited companies. Thanks to my friends at Companies Made Simple for the content.
Companies are governed by the Companies Acts. A company must:
• Keep accounting records
• Produce audited accounts (if turnover > £5.6m)
• File accounts and an Annual Return with the Registrar of Companies. This information is available to the public.
• Keep Statutory Books.
Sole traders and partnerships are not required by law to have annual accounts nor to file accounts for inspection. However, annual accounts are necessary for the Inland Revenue tax returns.
Personal liability and borrowing
Companies may have greater borrowing potential. They can use current assets as security by creating a floating charge. It is possible to limit personal liability for company debts.
Sole traders and partners are unrestricted in the amount and purpose of borrowings but cannot create floating charges. All personal assets are at risk.
Selling the business
Shares in a company are generally transferable – therefore ownership may change but the business continues. This is not the case with sole traders and partnerships.
Incorporation does not guarantee reliability or respectability but gives the impression of a soundly based organisation. Personally, there may be prestige attached to a directorship.
The unincorporated business does not appear to carry the same prestige.
Tax is payable on director’s remuneration paid via PAYE on the 19th of the following month. There is both employer’s and employees’ national insurance payable on directors salaries and bonuses. The NI charge is greater than that paid by a sole trader/partner. We will advise on a tax-efficient remuneration strategy. If applicable, higher rate tax is paid by shareholders on dividends under the self-assessment rules. Corporation tax is payable 9 months after the year-end. For profits up to £300,000 Corporation tax is charged at 21% (2010/11). This will fall to 20% in 2011/12.
For a sole trader or partnership, profits are taxed at 20% on taxable income to £37,000, 40% on taxable income in excess of £37,000 and at 50% over £150,000 (2010/11). Tax is generally paid by instalments on the 31 January in the tax year and the 31 July following the tax year. A partner/sole trader will pay Class 2 NI of £2.40p.w. and Class 4 NI dependent on the level of profits.
Losses in a company can only be carried forward to set against future profits.
Losses generated by a sole trader or a partner can be set against other income of the year or carried back to prior years. Businesses expected to make tax losses in the early years need to consider this carefully particularly if the owner has paid higher-rate tax.