An entrepreneur registering a business in the UK can become a sole trader or a director of a private Ltd. enterprise. Which structure is better in terms of taxation and liability? Discover in our brief guide to smooth company registration in 2022.
Any resident or non-resident of the United Kingdom can set up a business in the country. The most convenient way is through Ltd company registration online. First, the agent handles all paperwork on your behalf. Secondly, you get a business account and an app for free. Here is how your options compare.
Personal assets of sole traders are not separate from their corporate finances. If something goes wrong with the business, they are held legally liable. Their personal assets can be used to cover the debts of the company.
This does not happen with owners of Ltd. entities, as the personal and corporate dimensions are independent. A limited company can be run and owned by one person (director/shareholder). It must also be registered with Companies House.
Sole Trader: Advantages
- This legal structure is the simplest, so it minimizes the paperwork. Only the annual Self Assessment tax return must be submitted, and registration with Companies House is not required.
- The absence of incorporation means that you can enjoy more privacy, as your business does not show up on the database.
Sole Trader: Disadvantages
- Liability is unlimited, so your personal assets may be in danger if the business goes into debt;
- It is more difficult to raise capital, as private investors and institutions are wary of sole traders.
- As soon as you reach a certain level of profitability, you pay more tax than an Ltd. Thus, this model is less tax-efficient.
- Sole traders have no protection if another business uses their name.
Limited Company: Advantages
- The owner has only limited personal liability. Their finances are separated from the corporate financial flows. Even in the event of bankruptcy, personal assets remain unexposed, and losses are limited to the amount invested in the company.
- As Companies House has strict requirements to business names, you can be sure no other company can have a name closely resembling yours. It is also possible to register the brand as a trademark.
- Instead of income tax, you will pay corporation tax on profits. This will make your business more tax-efficient.
- You can claim more allowances and tax-deductible costs against your profits.
Limited Company: Disadvantages
As Ltd. companies are officially incorporated, they have to comply with specific requirements:
- the director’s fiduciary responsibilities,
- filing an annual company tax return,
- annual accounts.
Additionally, information about the business is stored in the official database (Companies House), so it is publicly available. Finally, registration requires a significant amount of paperwork unless you hire an experienced agent.
To Sum Up
The Ltd. structure has more advantages in comparison with the sole trader model. It is more efficient in terms of taxation and protects your assets in case your business underperforms. As an entrepreneur, you can be the only director, owner, and shareholder. While registering with Companies House is obligatory, a professional agent will help you save time, money, and effort.