We've had a few enquiries from enterprising types looking to launch a business but unsure whether to incorporate, or operate as a sole trader. Its not an easy question to answer and I always find myself, disappointingly, saying that "it depends..."
Here is a run down of the key things to consider for each option. If you want to talk this through or find out more about how it relates to your circumstances, contact me on firstname.lastname@example.org.
If you operate as a sole trader, any "profits" (i.e. income less business expenses) are subject to income tax, just as a salary from an employer would be.
This is all managed through HMRC's self-assessment tax return process. You can manage this yourself, and many do, or pay someone to do it for you for roughly between £100 and £300, depending on how complicated your circumstances are (the fee is tax deductible).
Overall, setting up and operating as a sole trader is simpler than incorporation. In terms of tax efficiency, it is important to consider your income as a whole. If you have an income stream outside of your business such as another job, business, or a property portfolio that earns you rent. If, when all is taken into account, you are into the higher rate tax band, any income from trading could be taxed at 40%. Ouch.
Incorporation itself is surprisingly easy. You can do it yourself for £12 via the government portal or pay a third party to do it for you. It takes a couple of days to process, then you'll get an email with an attached certificate of incorporation. HMRC send you quite a lot of paperwork, outlining responsibilities as a Director or "Person of Significant Control" (PSC), and getting you set up for the relevant taxes. Generally speaking, there is a lot more admin and legal stuff associated with a limited company in comparison to a sole trader. The gov.uk page that deals with this is quite comprehensive and can be found here:
You will have to think about corporation tax returns, companies house submissions, VAT (if your turnover exceeds £83,000 - though this applies to sole traders as well), annual accounts, PAYE if you intend to pay yourself or staff... there's more to do so you will usually pay more for accountancy support for a company than a sole trader.
The big plus point is that in some circumstances, it can be more tax efficient to operate via limited company. Companies are subject to Corporation Tax (currently 20% of profits) but you will only have to pay income tax on money you take out of the business - either in a salary, or in dividends. See previous post on Director Remuneration for more detail on how this works - once again, it depends on your individual circumstances.
Its important that you consider your whole situation before making a decision about how to proceed. If you are going down the limited company route, its definitely worth thinking about your remuneration early on so you know what to expect in terms of tax paid and money available to you for personal use. For more info or a free consultation, get in touch.