I am starting a business and wondering if to register it as a sole trader or Limited Company?

Are you asking yourself this question- WHICH Many DO:

I am starting a business and wondering if to register it as a sole trader or Limited Company?

I have read some very unusual answers to this one, and I would like you to look at HMRC guidance about registering as self-employed as this is at least what you should do if:

• you earned more than £1,000 from self-employment in tax year
• you need to prove you’re self-employed, for example to claim Tax-Free Childcare
• you want to make voluntary Class 2 National Insurance payments to help you qualify for benefits

I have read some advice that you do not need to register till you get taxable amount which is not true… please never assume that, as first of all if you reach threshold of NI you need to pay NI, if you additionally working and earning your self-employed earnings  (if your turnover is more than £1000) are taxable.

Choosing if to register as self-employed or Ltd is difficult decision, the answer is not a straightforward and depending from many factors.

 I have tried to show advantages and disadvantages of both structures so, you can save yourself time and money by taking informative decision. If you still have doubt please contact us for free advice.

Who are your customers?

Ask yourself a question how structure of your company can affect potential profits. In general B2B Limited Company business model would be preferable, with B2C Sole trader can be sufficient.

Businesses- Businesses mostly preferring Ltd companies as in our society Ltd has prestige and professional image.

Private – Most of private clients would not care about a company structure (no one ask hairdresser, cleaner or beautician if they incorporated or sole trader), but there are some trades where customer feels that Ltd give them more secure and better service example builders especially where structural work need to be completed.  

Where you would like to be in 3 years?

Significant Grow - If you would like to grow your company significantly – you can either start as sole trader and move later to set up Ltd Company, or to protect your businesses name it is wise decision to register Dormant Company but the confirmation statements and accounts would need to be submitted. So possibly you can save some money on accountant but this would not be significant amount.

Slow Grow- hobby business – if you not planning a significant grow than working on self-employed basis would keep your cost down

How much profit you planning to make?

As you have started looking to persuade your dream to be your own business you possibly have business plan ready.

Business plan specifying your forecasted turnovers and profits.

Usually ltd can bring more tax saving but the administrative expenses might eat all tax benefits, 2019/2020 was very difficult as dividends allowance was reduced from £5000 to £2000,  around £400 to £1200 with changing from self-employed to LTD.

So I  advise customers that the benefit from Ltd can be reached when your profits before your wages are at around £36000- £40,000.

Analyse your funding?

Do you need borrowing or your company expecting to have high credit sales and purchases?

For those businesses with high credit sales and purchases Ltd is always better solution due to limited lability of the owners.

What investment you planning for your company in next few years?

If you planning to reinvest most of your profit back to the business Limited company might be better choice.

You can split income?

If you wish you can split your profit with family like husband of wife and you can either issue tax free £2000 dividends or employee them?

Please contact us if you need help with deciding which business model is the best for your company.