Limited company versus sole trader

Advantages of a Limited Company

• A company may enhance the image of a business 
• The owners acquire the protection of limited liability – only in situations of fraud would directors become personally liable
• It may be easier for a company to raise loan finance. 
• It is easier to dispose of shares than individual assets if the taxpayer wishes to sell all, or part, of the business. 
• Retained profits are only subject to corporation tax, unless the personal service company rules (IR 35 provisions) apply. Profits will be taxed at a rate of no more than 19 %.  
• More generous pension provision can be made through a company than is possible by an unincorporated business.  
• Benefits in kind can be structured in a tax- efficient manner. Certain benefits may be exempt, such as the provision of a computer or a mobile phone or the payment of a mileage allowance or training costs
  
  

Disadvantages of a Limited Company

• A company must make statutory returns to Companies House. 
• There are greater disclosure requirements for a company than for an unincorporated business.
• Trading losses may only be offset against the company’s profits and not against the other income of the taxpayer.  
• There are no provisions to carry back losses in the opening years of trading.  
• It is not possible claim a deduction for remuneration paid to a spouse or civil partner in excess of a reasonable payment for the duties performed. Any excess will be disallowed in the company’s tax computation, whilst the spouse or civil partner will be taxed under PAYE on the full salary received. This restriction also applies to sole traders, but this can be circumvented by forming a partnership.
• The rates of NIC payable on salaries are higher than those pay able on the profits of unincorporated businesses. Class 4 contributions are payable on business profits at a maximum of 9 %, whereas primary class 1 contributions may be payable by the employee at 1 2 % and secondary contributions by the company at 1 3 .8%.  
• A company must pay tax on profits sooner than the self- employed. A company must pay tax nine months after the end of the chargeable accounting period, whereas an unincorporated business can create a period of up to 22 months between the end of an accounting period and the payment of the related tax.  
• There is a potential double tax charge on disposal of company assets ; first a chargeable gain in the company’s tax computation ,  and a subsequent tax charge when the proceeds are extracted from the company through either remuneration or a dividend.  
  
  

If you decide that a limited company is the right business structure for you, please feel free to download the helpful checklist below: