Sole Trader

Fundamentally, a sole trader is a sole owner of the business and is a self-employed person. Operating as a sole trader is the most convenient way to start business and because of its simplicity, sole trader is the most popular business structure.

Limited Company

A type of business structure that has a separate legal identity from its shareholders and its directors is known as a Limited company structure. The guidelines remain the same for a limited company even if it is run by an individual.

SOLE TRADER OR LIMITED COMPANY DIFFERENCE:

Sole Trader or Partnership

Limited Company (shareholder / director)

An individual is the sole owner of the business

The business is a separate legal entity from the owner / shareholder of the business

In case of a legal dispute the owner of the business will be sued

In case of a legal dispute the company will be sued. In the United Kingdom, it is very rare that somebody can sue a director for the firm’s default. Exceptional scenarios when a director may be held accountable are:

  • in general law, when the director is responsible for a fraud
  • where the company director(s) has committed some specific offence such as corporate manslaughter
  • in tax of tax evasion or any other taxation related issue

Employment status:

  • Self-employed; responsible for business activities
  • Starting April 2014, under proposed anti-avoidance provisions, members of a Limited Liability Partnership may be automatically classed as employees (who are on fixed profit/no risk arrangements)

Employment status:

  • A director is an office holder
  • A company’s officers are treated as employees for Income Tax and National Insurance purposes

Tax on profits:

  • A sole trader pays Class 2 & 4 National Insurance (NI) and Income Tax on the taxable profits of the business

Tax on profits:

  • In this case, the company is liable to pays corporation tax on the profits earned
  • Employees and other office members are subject to PAYE and NI
  • If IR35 applies, the company is required to deduct PAYE and NI

Losses:

  • For a sole trader, the business loss can be set of against the owner’s income
  • There is a cap on the amount that can b set of

Losses:

  • A limited company can offset its loss with other incomes, but not against the director’s income

Extracting profits

  • Business owner can withdraw money from the business

Extracting profits

  • Directors are taxed on any income withdrawn from the company. If it is a distribution it is taxed as a dividend
  • Most employee benefits are taxable

Borrowing

  • Sole-traders can borrow money from business bank accounts

Borrowing
A director can borrow money from the company, under certain limits laid down under Companies Act 2006:

  • The company is liable to pay 25% as tax charge, if amount is borrowed from the company and is not repaid within nine months
  • After 5 April 2016, the charge increases to 32.5% for loans. 

Pension

  • A sole trader can have a Personal Pension

Pension

  • Schemes from the company can be more liberal, in terms of reimbursement and benefits as compared to Personal Pension

Insolvency

  • A sole trader is liable for the debits in case of business failure

Insolvency

  • In case a company fails, a director is liable to the extent of the amount unpaid on the shares unless a director has made a personal guarantee for borrowing
  • A director can be held accountable if operations continue even when the company is insolvent. This can result into personal bankruptcy

Selling the business
Under the Capital Gains Tax (CGT) rules, if the business or any assets used in the business are sold sole traders are personally taxed for any gain

Selling the business
There is a double tax charge on shareholders, when the business or assets are sold. The company pays corporation tax

General expenses:

  • A sole trader can obtain tax relief for expenses that are incurred entirely from the point of trade

General expenses:

  • A company obtains tax relief for its expenses if they are incurred entirely for the reason of trade
  • Private expenses, by the director, are treated as earnings 

Cars and fuel

  • Disallowing a proportion for private use, a partner or sole trader can claim capital allowances on a car
  • As a sole trader, there is no adjustment for fuel benefit

Cars and fuel

  • Irrespective of any private use by employees, the company obtains full capital allowances on cars
  • Cars may be expensive as benefits in kind
  • Reimbursement using HMRC mileage rates for self owned

Mobile phones

  • Tax add-back is expected on the tax returns as mobile phones will be subject to private use

Mobile phones

  • Only one per household and mobile phones can be made available if the contract is in the company’s name, tax free

Charging rent for use of home

  • A sole trader is not permitted to charge rent to himself

Charging rent for use of home

  • A director can set up a license with the company to rent a space. Doing so will allow the director to recharge a share of mortgage interest

ABOUT DNS ACCOUNTANTS

DNS Accountants is a skillful team of accounting and taxation professionals that helps clients with services ranging from tax planning to self assessment to business set-up. The firm helps owner managed small business and private individuals across the United Kingdom. DNS is an acknowledged firm of ACA’s or Chartered Accountants (CA) and the firm takes pride in saying that we are very helpful to our clients & deliver unmatched customer service and constantly help clients to manage their wealth. The firm’s learned team focuses on helping sole traders with business registration, tax filings and other services such as self-assessment, payroll management and bookkeeping. At DNS, we are constantly in touch with our clients and offer

  • FIXED price service
  • Consistent and transparent service
  • Certainty on tax base and taxation advisory
  • Sole Trader or Limited Company Calculator
  • Complete guidance onto the difference between sole trader and private limited company
  • Step by Step procedure for becoming a limited company from sole trader

Other Services

DNS Accountants offers taxation & accounting services to owner managed businesses and freelancers / contractors. For business owners and freelancers / contractors, it is difficult to keep pace with the ever changing government regulations and rules. Our expert team of chartered accountants and taxation professionals help clients in services ranging from bookkeeping to payroll to tax planning, and filing tax returns. DNS Accountants help clients focus on maximizing their wealth.



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