Individuals thinking of venturing into entrepreneurship often face a common conundrum; whether to venture into the business world as sole traders or to form a limited company. The implications of either of these options are starkly different.
The first factor to consider when making a choice between trading as a sole entrepreneur or a limited company is the risk involved. If the potential business deals in high-risk products or services that are difficult to insure, then go for a limited company. Limited liability premise is the reasoning behind this which in layman terms simply means that if the business is liquidated or goes bankrupt, only business assets will be at risk (usually of acquisition by a third-party). The personal assets of the partner hold no stake in the life of the business.
A second factor that you need to evaluate when deciding whether to start a sole-owned business or a limited company is taxation. A sole trader you will pay less tax than a limited company if your taxable profits falls in the lower region of the tax bracket (£1 - £20,000). In this bracket, the increased cost of running a limited company will eliminate any perceived tax benefits. Above this bracket (£20,000 – £200,000) you will likely be better off forming a limited company as you will save more tax on profits.
However, you should note that these rules only apply if you withdraw all the profits your business earns. Retaining profits alters the playing field to a great degree. Let's suppose your company made profits of £200,000 and used £50,000 to pay its employees and share dividends among its shareholders, it would still retain £114,000 cash which it would reinvest into the business. In this scenario, the home pay and funds retained by the firm would be £42,000 more than what it would pay were it a sole-owned business. The assumption here is that a sole-trader would pay tax at income rates on all profits even those they chose to retain in the business, while a company would only be required to pay corporation tax at a rate of 19%.
Ultimately, it's always a good idea to speak to an adviser to determine what would suit you. At The Accountancy Cloud we would be more than glad to assist you with the services should you need help, therefore, feel free to contact us.