Business Structure - Pros and Cons

Something we are often asked by clients is whether they should incorporate or not.

Hopefully the below Pros and Cons is helpful. But please do get in contact before you make any decisions to discuss how this could affect you.

Company

Sole Trade

Formally incorporated with Companies House, initial setup cost for doing so

No formation costs, inform HMRC that you are a Sole Trader

Separate legal entity, more difficult to run

Business and individual are same entity, much simpler to run

Governed by Companies Act, therefore the company must:

- Keep accounting records

- Accounts audited (if over thresholds)

- File accounts and confirmation statements annually with Companies House. Info is available to the public

- Keep Statutory Books with Directors and Shareholders

Not required by law to keep annual accounts or file accounts for inspection. However, accounts are necessary for Self-Assessment tax returns (SATR)

Following filed each year:

- Accounts

- Confirmation statement

- Corporation tax return

- SATR for Directors/Shareholders

Only SATR to HMRC

Shares in company are transferable – ownership can change but business continues

Business generally ceases with the Sole Trader

Can be more prestige/marketability associated with being a Ltd

Being unincorporated does not always carry same prestige

Directors/shareholders are protected by veil of incorporation, only company assets are at risk

All Sole Traders personal assets are at risk

Tax on Directors:

- Only taxed personally when extracting income from the business

- Salary – PAYE to HMRC by 19th each month

- Dividends – SATR rules

Tax on Sole Trader:

- Taxed on all profit in the business

- Paid in instalments, 31 January and 31 July

Tax rates:

- Corporation tax – 19%

- PAYE – 20%/40%/45%

- Dividends – 7.5%/32.5%/38.1%

Tax rates:

- 20%/40%/45%

National Insurance:

- Employers – 13.8%

- Employees – 12% then 2%

- NI contributions depends on Salary

National Insurance:

- Class 2 NI - £3 p.w.

- Class 4 NI – 9% then 2%

Expenses must be incurred wholly, exclusively and necessarily for the business

Expenses can be incurred wholly and necessarily for the business