When it comes to tax, sole traders and limited companies are very different.
If you choose to set up as self-employed you will run your own business as an individual and both your business and personal taxes are treated as one. You must register with HMRC to complete a Self Assessment tax return every year and you will pay income tax and National Insurance on your profits.
As a limited company you have chosen to set your business up as a separate legal entity, distinct from yourself and the other shareholders and directors. Although the cost of setting up a limited company can be lower than you think (check out our formation packages), your tax responsibilities are different than being a sole trader.
You will need to put together statutory accounts for your business, send Companies House an annual return and you’ll also need to send HMRC a company tax return so that Corporation Tax can be calculated on your business profits.
As a director of a limited company you’ll still need to complete a Self Assessment tax return every year, but your tax and National Insurance contributions (NICs) will be taken through your company’s PAYE scheme. Any dividends that you receive will also be taxed – these will be calculated from the information you provide in your tax return.
Whether you have a sole trader business or a limited company you will also need to register your company for VAT if your takings are more than £81,000 in any one year.
Administration and the cost of setting up a limited company
Whether you’re setting up as self-employed or you’d prefer to start a limited company there isn’t a huge difference in cost. Using a formation agent can bring the cost of setting up a limited company to nearly nothing. With The Formations Company’s E-Formation package the cost of incorporating your company can actually cost less than if you were to go direct to Companies House.
One of the big differences between being self-employed and running a limited company is the administrative obligations that are involved. In general, running a limited company requires more returns to be completed, although in reality many of the details you need to file for a limited company are details you will also need to have to hand to help make your sole trader business successful too.
As a limited company you will need to keep company records, report any changes to Companies House and to HMRC, and to file an annual return and a copy of your company’s accounts, making sure they give a ‘true and fair view’ of its finances.
As a director of a limited company you are also obliged to try to make the company a success, to make decisions that are for the company’s benefit rather than your own and to tell other shareholders if you might personally benefit from a company transaction. You will also need to follow the rules laid down in the company articles of association.
For many businesses, whether limited companies, sole traders or business partnerships, these tasks, returns and communications are taken care of by an accountant and so, other than ensuring that they happen, are not a big trouble.
Your business and your personal liability
When you form a limited company you are, in effect, limiting your personal liability – making sure that if something goes wrong with the business, whether that’s because your business has run into debt or if a claim has been made against your company, your personal assets and finances will not be at stake.
As a sole trader, or if you’re in a business partnership, this is not the case and you will be personally liable for your business.
Bringing the cost of setting up a limited company down
So, how much does it cost to set up a limited company? Not much money nor time. With The Formations Company each step in the process is laid out for you and your incorporation can take as little as 24 working hours to complete. You can also choose from a number of different packages, offering basic formations right through to helping you through your first board meeting, as well as the tools to support you during set up and beyond.