This is one of the most common questions we are asked by, not just new businesses but well-established ones who are thinking of changing. Every business must have a legal structure and these are the most common for Owner Manged Businesses (OMB).

Each has its own pros and cons and we will take a look at these as we progress through the article and highlight what we look for when deciding what to recommend.

Sole trader

A sole trader is the most common legal entity for an OMB in the UK as it is generally the least complex.

Pros:

  • Easy to set up.

  • Tax is paid on the profit, therefore the money made is the owners and this can be used for personal expenses with no added tax consequences.

  • Less forms to file with HMRC, could be just 1 a year.

  • Some losses in the first year of trading can be used against 3 years previous income.

  • If you use your own home for the business, “Use of Home” can be claimed. HMRC have set rates, but we have a checklist to see if you can claim more.

  • Adding a car to the business is simpler and does not attract a benefit in kind.

  • Record keeping rules are not as stringent.

  • If a subcontractor under CIS, the tax deducted usually (but not always) covers your tax bill at the end of the year.

  • Lowers risk of being double taxed on selling the business in years to come.

Cons:

  • Liability, the ‘buck’ stops with the owner of the business. Even if they have insurance this could be limited putting the owner’s assets at risk.

  • Tax rates vary depending on the profit, from 0% to 45%.

  • Could be viewed as small, generally limited companies are deemed bigger and more robust.

  • First tax return can be complex, especially if the year end is not 5 April.

  • There are fewer tax planning opportunities with a sole trader than a limited company.

  • There is no tax relief on interest on loans made personally to the business.

  • For low emission vehicles, a company may be more beneficial tax wise.
Limited company

A limited company is the second most popular form of legal entity for a business in the UK as it offers a number of benefits compared to a sole trader.

Pros:

  • Many tax planning opportunities.

  • One tax rate, 19% on all profits.

  • Although many banks and lenders would require personal guarantees, there is more protection of an owner’s assets.

  • With a limited company group structure, potentially, the holding company could sell a subsidiary and pay 0% tax.

  • R&D tax credits can be claimed.

  • Potentially, claiming mileage for business trips in a personal car, may be saving tax and an efficient way of getting funds from the company.

  • Generally seen as a larger business than a sole trader.

  • 100% tax relief on the purchase of a new 100% electric vehicle.

Cons:

  • Considerably more forms are required to be completed, accounts, company tax return, confirmation statement, directors own tax return and numerous board minutes.

  • More complex to set up, we would always suggest advice is taken before setting up a company.

  • It is not as easy to obtain finance for a new company, compared to a sole trader.

  • The limited company is a separate legal entity to the owners, therefore to take money out of the business is more complex.

  • Limited details of the company are available for free on Companies House, for anyone, including competitors, to review.

  • For subcontractors, reclaiming CIS deducted is generally more difficult, for various reasons.

  • Record keeping needs to be of a better standard.

  • If a high emission car is added to the company, the benefit in kind charge can be extremely high.

So, what should you be……? 

Is not something that can be answered on a blog post on a website unfortunately. We would always advise you to sit down with an accountant to discuss what would be best for YOU as not only do the tax rules do change every year, where you want your business to go is a key item to be looked at.  

That is where a trusted advisor like Mountain Top can help to save a business possibly considerable sums each year. If you would like to discuss your options please call us on 01752 914214.

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