If you're considering starting a new business or changing your current business structure, we have included pros and cons of the two main structures available below.
This is the most popular way of running a business in the UK, and may be the best option if you want to get your company up and running quickly with minimal fuss. You can set the wheels in motion without worrying about filing annual accounts, paying corporation tax, or registering your business with Companies House.
Instead you just need to register for Self Assessment which is a simple process that can be done online. Following that your only administrative responsibility is to complete your Self Assessment tax returns each year. To help with this process you should get into the habit of keeping an accurate record of your expenses, receipts and invoices from day one.
A major drawback to this type of structure is that no legal distinction between yourself and the company exists; you as an individual are essentially the business. If the business fails for any reason, and there are debts outstanding, a self-employed sole trader is held personally liable for this and must ensure the debt is cleared. In extreme cases therefore, you could find yourself declared bankrupt as a result of your business’ financial difficulties.
You must pay income tax on any profits which take you above the personal allowance, currently £12,50 (22/23 tax year). You should be aware that your personal allowance includes any income received from other sources, for instance if you are in paid employment elsewhere. You are also responsible for making National Insurance contributions (NIC) on any profit above £6,365.
Choosing to set up as a limited company is not as straightforward as registering as self-employed, and it does come with ongoing additional administration responsibilities. The business needs to be registered with Companies House, directors must be appointed and an annual tax return along with a set of accounts must be filed.
On the plus side however you could find yourself paying substantially less tax than you would as a sole trader. This is because you are able to take company profits as dividends instead of receiving this as income; dividends are taxed separately, and are not subject to NICs. Due to this, limited companies tend to have more complex accounting responsibilities; however you can employ an accountant to ensure you are fulfilling your tax and legal obligations.
A major difference between a limited company and a sole trader is that a limited company is classed as a separate legal entity to its shareholders and directors. This means that unless fraudulent activity has taken place, you as a director will not be held personally accountable for any financial difficulties the company finds itself in. This creates a clear distinction between your home life and your business, which helps to reduce the financial risk to those individuals involved with the company.
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