A small business is a small business, right? Not during lockdown – with variable support offered by Government to limited companies and sole traders in the last 6 months, you might be wondering now which is the best legal structure for my small business. So let’s run through the key points to consider when looking at this.
What is a sole trader?
A sole trader is, in effect being self-employed and sole owner of a business. It is the simplest structure, with less administration. The HMRC reporting requirements for sole traders is limited to the self-employed pages of the personal self-assessment.
However, you are effectively the same ‘entity’ as the business, which means unlimited liability against personal assets if things go wrong.
What is a limited company?
A limited company is a separate legal ‘entity’. As it exists in its own right, there is more administration and you must comply with Director’s Fiduciary Responsibilities. As a shareholder/director your personal assets are much more protected.
However, some banks or investors will require Directors personal guarantees, thus negating some individual protection should things go wrong.
By registering that separate legal ‘entity’ at Companies House, there is protection for your company name. Some information on your company is publicly available, although for small companies the amount of financial information included in the publicly filed accounts is relatively small.
Accounting function tasks include annual statutory accounts, corporation tax, companies house filings, running a payroll, maintaining statutory records and dividend documentation.
What does all this mean?
The difference in legal structure means there are different ways to take money home…
For sole traders, your profits are automatically yours and taxed in your self-assessment.
In a limited company, there is an official process as one legal entity (the company) is paying another (you). The company will pay corporation tax, and you as an individual will pay income tax on remuneration. Salary is a tax-deductible expense for the business, whereas dividends can only be drawn from profits retained by the business. In terms of income tax, salary and dividends are subject to different rates so a balance can be struck between salary and dividend to minimise tax.
Ultimately, depending on the size of the business, there will be a number of tipping points where the benefits exceed the cost of additional administrative requirements. A number of other matters might also influence your decision:
- Future plans;
- Customer perception;
- Supplier credibility;
- Accounting support level; and
- Level of commercial risk.
With potential tax changes coming as indicated by the Chancellor, it may be worth starting to think about what may be best for your business, and wait to see what comes in the budget.
For further advice on this or any other matter contact [email protected] I am always happy to help or point you in the right direction.