Should you trade as a limited company?
Being a sole trader is a good option for many small businesses, but there are various reasons why you may trade as a limited company. However, there are advantages and disadvantages of this option.
Advantages of incorporation
- You have limited liability protection – This prevents individual company directors being personally liable for any of the company’s financial losses. In a sole trade, owners are personally liable for all business debts and liabilities.
- Tax efficient – Profits from a company are taxed at 19% (rising to 25% from 1 April 2023) compared to sole traders who pay 20%-45% income tax and are subject to National Insurance contributions. If you are a director and shareholder in the company, you can choose to take a small salary and withdrawal dividends from the company which are not subject to NI and have a lower income tax rate than a salary.
- Professional – In some industries, a limited company can provide a more professional image and encourage more confidence and trust among suppliers and customers.
Disadvantages of incorporation
More compliance – A sole trader must only file a personal tax return to HMRC each year. A company must prepare and file accounts in line with Companies Act 2006 annually to Companies House, along with compliance statements, as well as file accounts and a company tax return to HMRC.
- Losses – If a company makes a loss this can be offset against the previous year’s profits or carried forward against future profits. This can be a disadvantage especially in the early years of the business, whereas if a sole trader makes a loss, this can be set against other income and save tax.
- Filleted accounts on public record – When you file your limited company’s accounts and confirmation statement, these are available for anyone to see on Companies House.