Are You Self-Employed and Working as a Sole Trader?
The concept of a company was created by someone very smart many be centuries ago. This someone wanted to take advantage of the upside of running a business while avoiding the risks of the downside. The concept of the corporate veil has created endless wealth around the world.
Yet day in day out, I see many small business owners still working as sole traders. First off, they run their business with a significant amount of personal risk should something go wrong with the business. I am simply not able to understand why.
Yes, there may be some obvious reasons such as the hassle of additional paperwork and issues of compliance, but these additional burdens are far smaller when compared to the benefits associated with trading as a limited company.
Without doubt, the tax advantages of running a business as a limited company are significant: if you are already making £20,000 or more as a sole trader you can save significant amounts of money in taxes just by converting your business from a sole trader to a limited company.
Let me summarise some important benefits of running a limited company in order that you can analyse the advantages against the disadvantages for yourself:
The Benefits of a Limited Company
- You don’t pay National Insurance on the company profits you take out of the business. So, a major advantage of running a limited company is that you save a minimum of 8% in National insurance, which you will pay as sole trader.
- Secondly, you can pay yourself wages of up to £10,000 and claim that as an expense from the company.
- Should something go wrong with the business, you are not at personal risk. You can close the company and move on with your life.
- A businesses that is run as a limited company presents a more positive profile, and it benefits from appearing more professional and successful.
- There are significant tax savings if you are earning £40,000 or more, which if you do not need to withdraw more than 40,000, you can invest instead. In such cases, you will avoid paying 40% tax.
The Drawbacks of a Limited Company
- True, there is additional paperwork and compliance, but this is something a good accountant can easily take care of on your behalf.
- True, there is the additional discipline of managing the funds of the company. Remember, a company is separate from you and you must treat the company’s money separately from your own.
I can see no other drawbacks of running a business as a limited company. In case you want to find out more, why not get in touch with me at email@example.com or call me on 0208 903 6330.
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