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When considering switching from a sole proprietorship to a business, it is important to understand your legal, tax, and reporting requirements. To help you determine the right company structure for you, we have compared cost and liability requirements. Information obligations of individual dealers and companies.
No matter what type of business you own, you need a legal form to become a self-employed or limited partnership. There are important differences between the two, which means this is an important decision for your business. You need to make sure that you are making the right decision for your job.
Approximately 60% of businessmen are sole proprietorships and 33% are limited companies. However, doing business as a sole proprietorship is not for everyone. The following are the main differences between the two, so you can determine which one is best for you.
What is Sole Trading?
A sole trader is a self-employed individual operator. The company and the individual are not separate entities, so as an individual entrepreneur, you are personally responsible for any losses that the company may suffer. Save all after-tax profits.
The sole trading is responsible for keeping records of sales, expenses and financial matters. This includes filing an annual self-assessment tax return and registering as a sales tax payer when your income exceeds the sales tax threshold.
What is a Limited Company?
A limited company is a company that is a legal person, that is to say, it is different from those who own and operate the company, and their liability is limited to the investment they make (hence the term “limited liability”).
Companies usually operate on a “share” basis, which means that the company is divided into equal shares with added present value, and these shares are distributed among shareholders. It should have been registered in the company building and must comply with the provisions of the 2006 Company Law.
What is the Difference Between Sole Trader & Limited Company?
One of the biggest differences is that the sole trader is personally liable for the debts of the company. Personal assets such as your house and car may be used to repay creditors. The limited company is an independent legal entity, and your potential creditors can only claim the assets of your company.
Starting a limited liability company may be more expensive and the start-up time is longer, but it can also provide more security for your personal assets, which can give you a higher reputation in the industry and more taxes discount.
Of course, there is less red tape when working as a sole trader in the United States, but as a self-employed person, there is a limit to how much you can grow. Many of our clients started their business as sole proprietors and later became a limited company, so this is also an option.
| Parameters | Sole Trader | Limited Company |
| Profits & Taxes | Sole traders pay social security taxes and income tax categories 2 and 4 for all profits from their business activities. Members pay the same fees, but only pay for their shared profits. | A limited liability company pays corporate tax on all taxable profits. Taxable business income is lower than the income tax paid by a sole proprietorship. Company officials and employees are required to pay income tax, NICS and PAYE. |
| Borrowing | Provides a loan from a sole trader to your commercial bank account as you can borrow money from them. If the withdrawal results in an account overdraft, the tax credits related to bank charges and interest are limited to the amount counted as an overdraft. | The 2006 Company Law allows company directors to borrow money from limited liability companies. The tax liability is constituted as follows: The company pays 25% of the commission. If the loan does not accrue interest, the director must pay taxes. |
| Insolvency | A sole proprietorship facing the threat of insolvency bears personal responsibility for all of the company’s debts. The same goes for associations. Both sole trader and shareholders may face bankruptcy and the threat of insolvency. | An insolvent limited company limits the liability of directors to the unpaid shares they hold, unless the directors personally provide guarantees for the company’s loans. If the directors of the insolvent company continue to work after insolvency, they shall bear personal liability. This may lead to personal insolvency. |
| Selling the Business | Profits from the sale of a company or its assets are taxed under the capital gains tax rules. The sale of corporate assets or part of participating companies can also be taxed as capital gains. | The sale of a limited liability company or its assets will incur corporate income tax, as well as taxation of any distributions or profits received by shareholders. Tax regulations sometimes make it more profitable to sell shares in a limited liability company than to sell the company or its assets. Directors of companies that own more than 5% of a limited liability company may be eligible for lower withholding tax on income of up to £10 million. |
| Death of Owner | The business ends after the death of the sole-trader. The business can be transferred in whole or in part. Every eligible trade is also eligible for basic trade tax exemption. | After the death of the director, An LTD continues to exist. Unless a limited liability company is mainly engaged in investment activities, its shares are exempt from commercial property under the inheritance tax law. The inheritance tax credit does not apply to outstanding loans provided to deceased directors. All directors’ assets other than LTD are eligible for a 50% discount on commercial real estate. |
The Bottom Line
It’s not that one is better than the other. Whether you are a sole trader or a limited partner, it should depend on your personal choices and preferences, maybe even the industry you work in, your growth plan, and even your tax strategy (if you are that far away).
As you can see, whether to register your business is not an obvious choice. The decision that is best for your business will depend on your personal circumstances and should be discussed with your accountant.
