Key differences Due to the lower corporation tax rates, especially for businesses with lower turnover, limited companies are generally taxed less on their profits than a sole trader and therefore tend to be more tax efficient. This is especially so if the profits are invested back into the business rather than extracted, as profits ploughed back into the business are taxed at a lower rate than would be the case if a business operated as a sole trader. Limited companies can also offer a wider range of tax-free benefits to directors and employees and open up access to certain tax reliefs that aren’t available to sole traders, such as R&D tax reliefs. However, unlike a sole trader, money cannot be borrowed from the business’ bank account for personal use with impunity. Doing so in a limited company will be considered a ‘benefit in kind’ and carries potential tax ramifications. Bureaucracy While a limited company structure offers limited liability and potential tax advantages, it involves more bureaucracy to set up and manage, which you will either need to spend time doing yourself or paying others to do for you. Overall, a limited company structure comes with more reporting requirements and, as a quid pro quo for the benefit of limited liability, the directors of the company have a wide range of duties and fiduciary responsibilities, which can, in turn, create additional costs and paperwork. For example, as a director of a limited company you must register the business with HMRC and are legally required to set up a separate company bank account. Accounts must be prepared each year and submitted to HMRC – and they may need to be audited. This offers less privacy, as these accounts are publicly available to everyone online via Companies House, along with your details and those of any other directors. However, the limited company structure offers greater flexibility in the way you can allocate shares and employ people, allowing you to issue shares in the company to spouses and family and/or appoint them as salaried directors to improve tax efficiency. A corporate structure can also help to create a more professional impression to your clients and suppliers. Due to the additional formalities in forming a company, setting up as a sole trader is the simplest way to get your new business off the ground. To become a sole trader, you must register with HMRC as self-employed. This consists of a straightforward online registration form. Timing does matter, however, since there can be financial penalties if you fail to register before the end of the relevant tax year once you’ve started trading. Unlike in a limited company structure, as a sole trader you aren’t legally required to open a separate business bank account. That said, it’s generally advisable to do so in order to keep better track of business income and expenditure and assist in preparation of tax returns. Sole trader profits must be calculated for each tax year (April 6 – April 5). Like a limited company, accounts (i.e. a record of business income and expenses) must be prepared to determine the profits of the business, but unlike a limited company they don’t need to be audited or submitted to HMRC, unless specifically requested. It is possible to change from a sole trader to a limited company, and vice versa, but it is usually easier to start as a sole trader and incorporate later rather than the other way around. Ultimately, it is important to think carefully about what works best for you and seek professional advice if you’re unsure. Having the right structure in place to suit your specific circumstances and ambitions will put you on a strong footing for future success. Haydn Rogan is a tax law specialist and partner at national law firm Weightmans. Read more Registering your business: sole trader or limited company? – Here, we speak to four small business owners about the decisions they faced when registering their company and what influenced their choices Sole traders and VAT – Whether you pass the VAT threshold or register for VAT voluntarily, we explain everything you need to know about Value Added Tax 9 accounting software platforms for Making Tax Digital – Here, Mariah Tompkins scrutinises accounting software options that small businesses can use for their digital tax returns. 6 tax breaks every small business should know about – You could add thousands of pounds to your small business bottom line by applying these little-known tax breaks Tagged: