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.

Deciding whether to incorporate your business depends on your circumstances and you should discuss this with your accountant. For further advice, please contact me or your local Westcotts office.