Sole Trader / Partnership v Limited Company

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

Employment status:

• You are self-employed.

• You cannot also be an employee.

Employment status:

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

Tax on profits:

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

Tax on profits:

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

Losses:

• You can offset your trading losses against your other income.

Losses:

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

Extracting profits:

• You may withdraw cash from the business without tax effect.

Extracting profits:

You are taxed on the following:

• Any income withdrawn from the company.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.
• Most employment benefits received by you or your family and household are taxable (subject to tax-free exceptions).
• Shares or securities in the company which are given to you at less then market value.

Borrowing:

• 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:

• 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.
• If the loan is interest-free there will be a taxable benefit in kind for the director.

Pension:

•  You can only have a Personal Pension.

Pension:

• Company schemes may be far more generous in terms of benefits and limits than Personal Pension.
•  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.
•  Stakeholder Scheme pensions must be available when you employ 5+ employees.

Insolvency:

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

Insolvency:

•  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).
•  As a director you can be held personally accountable if you continue trading when your company is insolvent and this causes financial loss to creditors. This could result in your personal bankruptcy.

Accounts:

•  You prepare annual accounts for your personal tax return (Self Assessment). They can be in a very basic format.
•  Your accounts are not submitted to HMRC unless you are subject to an investigation.
•  Your accounts must be prepared in accordance with accounting standards.

Accounts:

•  You prepare annual accounts under the provisions of the Companies Act.  These can be abbreviated for filing with Companies House.
•  HMRC requires full accounts for Corporation Tax which must be submitted using its own or specialist software.
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