Limited Company vs Sole Trader

hey guys it's Caroline here from the

Juniper links counselling channel and

today I'm gonna go through unlimited

company versus of sole trader setup so

I've already done them in two versus

umbrella and this one's gonna explain

the difference between limited and sole

trader now I'm not gonna briefly talk

about how each one is set up just so you

kind of know the structures of them then

I'm gonna go through the pros and cons

of each one so you can decide for

yourself which one fits best for your

own circumstances and I'll also go

through some practical examples of how

the taxes work with each option so again

all of this information will help you

come to a decision at the end of Wow

limited works best for me I'm gonna go

with that or I'm gonna stick with sole

trader so let's get started I'm just

gonna jump into my computer here in a

second so we can actually see what's

going on between the two so in this

little presentation I've put together

for you guys we're gonna go through

Limited company versus sole trader so

what is a limited company it is a

private company so it's not gonna be

listed on like a Stock Exchange or

anything like that it's basically your

own little bubble company that you run

internally then it's normally limited by

shares or the amount invested there are

there ways to limit it but this is the

most common and what this means is when

you setup the company initially often

you'll just have a one-pound share

especially if you're the only owner of

the company and that money is basically

if the company goes bust and it can't

pay anything basically and it needs to

shut down you've lost one pound and

that's it obviously this is very useful

and I'll get into that in a minute

so owners can receive profit after tax

in the form of dividends this makes it

very tax efficient and you also have

separate legal entities so you're not

personally liable for debt unless there

is a clear negligence by the director

and what is the sole trader so it's a

single self-employed person running a

business it's very simple reverse shares

there's no limit of liability and

there's no separation so basically if

the company has debt it's your personal

debt as

so you're personally liable for things

all the company profits also treated as

your personal income so there's no

separation it's just you are the

business or self anything happens it's

personal tax basically sole trader pros

so first of all it's easy to start

although you do have to notify HMRC when

you start trading the accounts are

really simple to complete you don't have

to submit anything to the companies how

to do that and the only legal filing

requirement each year is your

self-assessment obviously there are

certain rules that you need to follow

just like with limited companies in

terms of what expenses are allowable and

so on but these are normally more

simplified and easy to understand and it

can be tax efficient with low profits

basically there's not going to be a huge

benefit in you opening a limited company

compared to sole trader if your profit

solo but there are other advantages I

will get into here in a second

sole trader cons so there's no legal

separation between you and the company

again company debt is your debt so if

you mess up the company you're also just

screwed basically you're gonna have to

pay for that assets are not protected

again because there's no separation

personal liability for debts all company

income is treated as your income so it's

not very flexible at all in terms of

what you can take from the business so

if you're turning over a lot and your

profit is high you're forced to take all

that income whether you want to or not

with a company who have the option it

can stay in the company and you can take

it you can take over much you want when

you feel like so the higher your profit

the less tax efficient it becomes which

we'll see here in a minute as well

limits company cons more complex legal

requirements for accounts and returns

but these are problems they're easily

affect with an accountant directors

responsibility to ensure company tax is

paid on time so again this is where the

whole negligence thing comes into play

if you're obviously making bad choices

where your company can't pay its tax as

the director such as taking well taking

dividends when you shouldn't which is

considered a

from the company and that's preventing

your company from paying tax and then

your company needs to get shut down

because it can't pay its tax HMRC could

potentially chase you personally because

of negligence so you just got to be

careful they're set money aside for

personal tax more discipline required so

I mean yes it is a con but also as a

sole trader you often will have a tax

bill as well unless you're doing

something like C is for your taxes

already deducted so you don't have to

worry about it that kind of thing so

yeah but again accountant will fix this

stuff for you because you can predict

what tax will be disclosed company

information in the public register so

yes there are certain details displayed

on the public register for anyone to

look up basically with your company name

and number so the first things first is

the registered office address you can

use a service to keep your personal

address off the public record and yes

you will need to submit accounts to

Companies House and they those will be

displayed for my three companies we only

need to submit a balance sheet so that's

a very limited information that someone

could actually see about your company

which is not a big deal at all for most

people and you need to pay for an

accountant oftentimes we need to pay for

one with sole trader as well but the

fees are normally cheaper because again

legal requirements are much lower at the

same time having an accountant or

ultimately it'll make your life way

easier and prevent costly mistakes so

it's kind of like a con and a pro at the

same time there is a company pros you

can get tax efficient pay through salary

and dividends you can be flexible with

how you pay yourself so for example if

you're happy with the amount you've

taken from the company you really don't

need that much income you'd rather leave

the funds in the company to invest in

something else such as you could pay

money into your own personal pension

scheme or a private pension scheme your

company can do that with tax relief you

can also choose to invest the money

elsewhere and keep the money circulating

within the business rather than was

drawing it and paying the personal tax

on it then if the company is a separate

legal entity

so there's separation of company and

personal debt again you've only got the

one pound share in there

that's what you live if the company gets

closed down you have more credibility

with clients so it's like an actual

company incorporated on Companies House

they'll see you've got more

responsibilities to take care of you're

actually taking it seriously that sort

of thing you could ask for higher pay as

well you have protection of your company

name so because it's already registered

on Companies House no one else can take

your name if it's a big deal for you you

want it to be like an international

brands just check in some other places

to make sure it hasn't already been

taken but in the UK it will be protected

as its own company name you've got the

ability to add shareholders for funding

they will obviously benefit from that

investment because you'll have to pay

them dividends based on how the shares

have been set up they will also have

voting rights in your companies so

you'll just have to be a bit careful

with who you let into the company

because they essentially own it now so

anytime you want to keep full control

over your own company never give more

than 50% of your shares away you always

want to have 51% of course if you're a

husband-and-wife company and you have no

problems letting the share is 50/50

that's fine so each of you can have one

pound share in the company and then you

have an asset that can be sold later if

you wish you could potentially do this

with sole trader but is gonna be much

harder because there's no separate legal

wrapping around the sole trader it's

basically you as the person an

individual trading so with the company

you've got a physical asset you can

actually sell to someone and they can

take over it so these are some big

prayers of a limited company now in the

next page you'll see basically income

and profit comparison for the 2019-20

tax here on the Left we've got sole

trader here you won't see a huge tax

benefits with this amount of pay and

essentially I'd recommend setting up a

limited company if your sole trader

income so the profit your company's

making as a sole trader is 15 to 20

thousand pounds a year you can do it

with less of course as long as

happy to do the accountancy side so for

example accountancy fees are always

higher with a limits company however if

you want to benefit from having the

separate legal entity from protecting

your assets from having the company name

saved and all of those things you can

set up a company from day one and it's

not problem as long as you do the

company accounts because they will

companies house will shut your company

down if you don't do your confirmation

statements and company accounts I

wouldn't recommend starting with them

it's a company if you're not prepared to

pay out for an accountant is the only

thing I'd say so on 120 per day pay or

about 30k turnover and that's good with


so I'm basing this on fully working here

of two hundred and forty days and also

the fact that you have recently set up

flat rate that scheme and you're a

limited cost trader so your costs are

not high enough to have your actual flat

rate percentage instead it's the basic

rate fifteen point five percent in the

first year so you have the flat rate VAT

gain here and you've also got the same

expenses going through so like the phone

travel supplies all the same

apart from accountancy fees which is

again because of the limited company

they are higher and you've also got use

of home allowance which is a special

allowance for limited company directors

and then you've got salary here so your

salary is an allowable expense for the

company and this is a ballpark figure of

the salary in twenty nineteen twenty

that is most tax-efficient for single

directors but of course if you add your

wife on to the company and she's working

for as well you immediately can start

running both of yourselves higher salary

than this sole trader you can't do that

you'd have to set up a partnership and

it becomes a bit complicated and

honestly once you start getting into

partnership territory you might as well

go a limited so we've got the profit

figures for both of them here twenty six

thousand four hundred for the sole

trader and sixteen nine hundred for the

limited so these are the class two and

for national in sure

you need to pay personal tax take-home

pay is 21900 here you've got the profit

figure for the company which is

essentially what's available as

dividends you've got these salary as

well which you took from the company and

you've got the 216 years of home I'm

including this as income because you

would have spent two either way so

you're extracting this extra money from

the company essentially for free and

then you've got personal tax year on the

dividends and what's left is 21 984 and

the sole trader has 21 900 so it's only

about 100 pounds difference for the year

not huge tax savings but keep in mind

the accountants fees are a lot higher

and also the tax figure is a lot lower

it's almost exactly the amount of the

accountancy fees have been greased by

again the limits company gives you other

benefits than just a bit extra profit it

gives you that protection you want for

your finances example two so here we've

got a bit of a ridiculous example

because no sole trader would be well

they could definitely turn over this

amount but if they're making this much

profit like a hundred and five thousand

profit it would be not very smart to

continue as a sole trader and you'll

basically see why here in a minute not

in a minute you can see on the screen

right now so again taxes and national

insurances and you're left with about

forty thousand nine hundred limits a

company is all the same expenses again

accountants fees are a bit higher the

accountancy fees here are higher because

this would be a more complex case for

sole trader work regardless it's got way

more money going through it and I've

also included a pension contribution in

this case of forty thousand pounds which

is your maximum allowance per tax year

and this pension contribution saved both

examples a lot of tax money which I

won't go into just now because it is a

bit complicated but trust me when I say

a lot of tax money was saved with this

forty thousand contribution it

essentially raises your lower rate tax

thresholds so you don't pay higher rate

taxes until way later

the company get full corporation tax

relief on that contribution so again

you've got the salary you've got the

dividends you've got the use of home

allowance and finally you've got your

take-home pay of fifty thousand four

hundred and eighty pounds and on the

sole trader side you've got the profit

tax again take-home pay of forty

thousand nine hundred pension

contribution here has been deducted

because you paid for that personally

that is no longer your take-home pay so

nine almost ten thousand pounds less tax

going through limited which is always

nice and almost ten thousand pounds more

income so as you can see these are even

now a lot more because you can't fees

are more similar but once you start

getting into these higher earnings

thresholds the limits company really

wins because you don't have to take all

of these dividends here you could choose

to take thirty thousand in dividends and

save yourself quite a bit of tax money

by doing that so what you see here is

like a separation where you can choose

to keep the money in the company rather

than taking it all out as income and

just getting taxed ridiculous amounts so

when it works for a limited company you

take action and set up a company well

that's not too different to actually

notifying HMRC of your trading if you go

with an accountant such as our

accountancy services will do the limits

company set up for free as part of our

monthly service use accounting software

for expenses banking invoicing very easy

to do this and I'll save loads of hassle

and doing our accounts and things like

that so this is kind of mandatory really

for them it's companies you don't want

to be messing around with these things

and obviously definitely keep track of

expenses because they always reduce your

corporation tax as long as they're

allowable of course you can't just put

anything in there what I but fortunately

it will let you know if there's a

problem so budgeting for quarterly

dividends yes HMRC prefer that you take

out quarterly dividends but you do have

the option to take monthly just make

sure that when you do take the dividends

they're separated from your salary each

month so HMRC doesn't just decide that

all of the income be receiving from the

company should be taxed the salary

that's not a good scenario to be

and finally again an accountant's help

with drawings advice payroll legal

filing all that stuff basically all the

difficult things to do with limited

companies when you compared to sole

trader an accountant will help massively

and all you have to worry about is

updating software when it doesn't work

so you take it all the money from the

business account leaving none for tax

this is a huge problem because again

this could be considered negligence by

HMRC and they'll chase you personally

which is no different to a sole trader

so make sure you don't do that you don't

keep track of your expenses and save

receipts this makes it far less tax

efficient but it would essentially be

the same with a sole trader if you

didn't do that you just get taxed on all

of your income regardless and nothing to

reduce your tax bill you don't stay in

touch with your accountant obviously

this can create many problems and your

income is too low yes if you can't

afford the accountant it's probably not

a good idea to go ahead and set up the

minutes of company and just because you

are going to need the accounts to be

done so 15000 again like I said 15 to 20

K profit as a sole trader at this point

it's definitely worth switching your

business to a limited company because

you are starting to make some money

and you want to protect that money more

security for your finances all the

hassles taken away with a good

accountant and you get to pick when and

how to take money out of your business

so again you get the flexibility you

also get protection there's really no

reason not to switch at this point and

the choice is yours so would you pick a

limited company or would you pick sole

trader so you want to protect your

business and save money or you want to

keep things simple but pay more tax and

it's really not that simple as a sole

trader to be honest because you will

have to still keep track of your

invoices keep track of your expenses and

essentially you will likely have a

business account that you want to look

through to do these things at the end of

the day it's the same with a linens

company if you have a good accountant

that's the only difference but just as

it is if you can pay an accountant then

set up the limits company it's overall

better but of course you are a free

being and you can choose whatever you

want it's not my business

I'm just telling you there is a better

option thanks so much for sticking to

the end of this video and watching my

sole trader vs. Limited comparison if

you did have any questions feel free to

leave them in the comments down below

and we'll get back to you as soon as we


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company or a sole trader is better for

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