What is best limited company or sole trader
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
that
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
can
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company or a sole trader is better for
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