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One of the most common questions asked by those setting up in business is the difference between a sole trader vs a limited company. The decision is important as it effects not only tax payable but also has implications for your legal and financial responsibilities, the amount of paperwork you will need to complete and how other businesses view you.
As a sole-trader, you are not considered separately from the business. I.E. you are the business. As a sole-trader, you trade under your own name, you will send bills under your own name and crucially, any debts will be in your own name.
Therefore, if as a sole-trader, your business falls into debt, these debts become your personal responsibility and you can be held personally liable for the payment of these debts. This is a serious consideration for anyone thinking of starting a business as a sole-trader. For example, if you can’t pay your self-assessment, VAT, PAYE, or suppliers, there is little you can do to avoid possible bankruptcy.
Unfortunately your liability may not stop with debts. If you operate as a beauty therapist and you damage a patients skin, you could be sued personally (make sure you get yourself some insurance!).
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Historically lower rates of tax was one of the main benefits of setting up as a limited company rather than trading as a sole trader. Successive changes to the taxation rules, in particular, changes to the way dividends are taxed, have eroded the tax benefits over time.
Even with these changes, however, it is still more tax efficient to operate as a limited company vs a sole-trader.
As a limited company you also have the advantage of having the flexibility of when to take money from the business and therefore you have a greater scope to be able to manage your tax affairs to your advantage.
Contact UsAnother consideration that needs to be looked at when deciding on a sole-trader vs a limited company is the impression you wish to make on the customers you are targeting.
Except for the smallest of customers, most people would rather do business with an entity that “looks” as if it is professional and well set up.
Although a limited company is no guarantee of a well run business, in the eyes of the customer, a VAT registered limited company is always going to be seen as more professional than a non-VAT registered sole-trader.
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Most freelancers choose to operate as a limited company simply because so many potential clients and agencies will only do business with individuals who operate in this way.
The downsides of the limited company are more rules and regulations, accountancy fees tend to be higher and the penalties for getting your paperwork wrong are greater.
That said, the tax savings are likely to completely outweigh any additional fees.
Contact UsThe internet is littered with companies offering formation services for under £30+VAT.
These services are fine if you know what you are doing, but if you choose the wrong options, you could easily spend in excess of £100 + VAT and be locked into a registered office located in England with no possibility of moving the company back to Scotland.
At A&A we will set up your limited company, register you for VAT, PAYE and self-assessment and provide face to face advice on how to operate your business and what paperwork to keep. For this peace of mind, our prices start at only £100 + VAT.
Call us now on 0141 334 2620 and put your mind at ease!
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