Sole Trader / Partnership v Limited Company

Mar 30, 2020 | Bookkeeping, Business, Start up business

Thinking of setting up a new business?  Unsure whether to register as a limited company, or operate as a sole trader or partnership?

This comparison illustrates the main differences between a business run by a sole trader or partnership and a company managed by its owner director/shareholder.

As you will see, there are significant differences in the way remuneration is taken as well as the tax and NIC implications.

Sole Trader or Partnership Limited Company: you are director & shareholder
You are the business The business is a separate legal entity
You are the owner You are the shareholder
You are the manager/proprietor

You serve the company as its director (and perhaps company secretary too)

Employment status:

  • asfb-favicon2-transp You are self-employed.
  • asfb-favicon2-transp You cannot also be an employee.

Employment status:

  • asfb-favicon2-transp A director is an office holder. This does not automatically make him an employee in terms of employment law.
  • asfb-favicon2-transp For tax and National Insurance purposes company officers are generally taxed as employees.

Tax on profits:

  • asfb-favicon2-transp You pay Class 2 & 4 National Insurance and Income Tax on taxable profits, or your share of profits.
    • asfb-favicon2-transp Your top rate of tax is 50%

Tax on profits:

  • asfb-favicon2-transp The company pays Corporation Tax on its taxable profits. Company tax rates are lower than higher rates of income tax.
  • asfb-favicon2-transp Employees and office holders are subject to PAYE and NICS on their pay and most benefits in kind. 
  • asfb-favicon2-transp Shareholders pay higher rate tax on dividends.
    • asfb-favicon2-transp When IR35 and the Managed Service Company provisions apply, the company must deduct PAYE and NICs on the income affected.

Losses:

  • asfb-favicon2-transp You can offset your trading losses against your other income.

Losses:

  • asfb-favicon2-transp The company can offset its trading losses against its other income, but not against your income as an individual.

Extracting profits:

  • asfb-favicon2-transp You may withdraw cash from the business without tax effect.

 

Extracting profits:

You are taxed on the following:

  • asfb-favicon2-transp Any income withdrawn from the company. If it’s a distribution it is taxed as a dividend. If it is earnings it is under PAYE and subject to NICs.
  • asfb-favicon2-transp Most employment benefits received by you or your family and household are taxable (subject to tax-free exceptions).
  • asfb-favicon2-transp Shares or securities in the company which are given to you at less then market value.

 

Borrowing:

  • asfb-favicon2-transp You are free to borrow from the business bank account. After all, it is your account.

Borrowing:

A director may borrow from his own company. Limits are set by Companies Act 2006, but there are tax costs:

  • asfb-favicon2-transp The company will pay a tax charge of 25% if you borrow from the company and do not repay the loan within nine months of the year end.
  • asfb-favicon2-transp If the loan is interest-free there will be a taxable benefit in kind for the director.

Pension:

  • asfb-favicon2-transp You can only have a Personal Pension.

Pension:

  • asfb-favicon2-transp Company schemes may be far more generous in terms of benefits and limits than Personal Pension.
  • asfb-favicon2-transp A SIP or SAS, or an unapproved scheme may be used to hold assets used in the company and may have flexibility on borrowing multiples.
  • asfb-favicon2-transp Stakeholder Scheme pensions must be available when you employ 5+ employees.

Insolvency:

  • asfb-favicon2-transp If the business fails you will be personally (or jointly with your partners) liable for its debts.

Insolvency:

  • asfb-favicon2-transp If the company fails, your liability is limited to the amount unpaid on your shares (if any) unless you have made a personal guarantee (which is often           required by banks).
  • asfb-favicon2-transp