Sole Trader or Limited Company?
One of the most common considerations we look at with our clients is whether to trade as a sole trader or a limited company. There are implications for tax, legal status, how your clients and peers view you, and the amount of paperwork and form filling you will need to complete.
There is no one answer fits all, but selecting the correct vehicle could save you thousands of pounds in tax. If your profits look set to be in the region of £40,000, setting up a limited company and paying yourself in a combination of salary and dividends could reduce your tax liability when compared to a sole trader by over £2,500, and the savings increase as your profits grow.
If in the early days of business you are investing to get things off the ground then you may incur losses. If this is the case then the sole trader route may be better for you as sole trader losses offer greater flexibility and can often be used to carry back to earlier tax years in the first few years of trade to trigger a tax refund.
The right structure for you will depend on your personal circumstances, and possibly the market that you operate in. Once you have decided to be your own boss, you need to choose the best structure for you.
This decision should be taken from the outset and before you commence trading.
Your legal structure is also something that you should take time to review periodically when you have started the business. It may be that a sole trader was the right choice for you at the outset but a couple of years in a limited company may be more appropriate.
Changing legal status has its implications, but with the right advice it can be a relatively straight forward process.
Making a mistake with your legal status could be costly and time consuming so do your research and make sure you make the right decision from the outset.