For a sole trader it’s an enormous change to make from being self-employed and becoming Director of your personal Limited Company.
Although being a sole trader remains the most popular option for running an enterprise in the UK but there are certain benefits to taking your business one step further by running it as a fully fledged limited business.
What is a Sole Trader?
Making yourself sole trader self-employed is really easy. This is the reason why thousands of sole traders opt for this option each year. It is possible to register to do Self Assessment online with HMRC and get an individual tax code reference number.
You’ll have to establish yourself in the sole trader category:
You earned more than £1,000 through self-employment during the 6th April of one year and 5 April the next year.
You must prove that you’re self-employed for instance in order to claim Tax-Free Childcare
you’d like you to pay voluntary class 2. National Insurance contributions to ensure you be eligible for benefits
Then, at the end of each tax period, you just record your business’s income and expenditures using the annual self-assessment and pay HMRC any taxes you owe. National Insurance contributions you owe.
You will receive your personal online digital tax account, where you will be able to monitor any benefits payments you’re receiving as well as prepare your data for your self-assessment each year. Also, you can pay for your taxes and NI bills in this account too.
As a sole-trader – you own your company! If you are unable to perform your duties for reasons beyond your control, your company might cease to exist without the assistance of.
Your personal assets are at risk. If you decide to shut down your business due to any reason, you’ll be personally responsible for all company’s obligations. This means that you’ll be at risk of losing personal assets, such as your home and car to pay off any debts owed by the company.
What are the reasons to consider UK company formation?
The company formation procedure to establish an Limited Company does involve a bit more effort than just applying for self-employment. There are a lot additional administrative and financial obligations to fulfill when managing a limited business, however these extra duties are worth the effort in order to enjoy the many benefits that come with the Limited Company status.
Let’s look at 10 good reasons to ought to think about forming your own business in the UK in the near future, rather than being self-employed.
If you are an officially registered Limited Company you will likely be taxed less than a sole trader.
As a director in your own business You may choose to receive a modest salary from the company and later earn more from dividends from shareholders. In this way, you’ll effectively cut down on how much National Insurance Contributions (NICs) you’ll have to pay.
Because dividends from limited companies are taxed as a separate item and aren’t taxed as NIC payments. This means that you may take back more of the profits from your company.
Your business will be a legal independent entity
An registered company will be its own separate entity that is totally independent of you. This means that everything stored under the company’s name, from its business bank account, to credit agreements, loans and assets are totally separate from those belonging to the shareholders of the company.
It means your private assets would be secured in the event that your business needs to close for any reason (other that when there are criminal acts involved, such as fraud).
Limited Protection from liability
A sole trader does not have limitation on liability and are personally liable to pay back any debts accrued under their company name. With the limited company you are protected by ‘limited liability protection.
In the event of a limited liability insurance policy Any financial losses suffered by your company will be covered by the business, not you personally. This could mean selling the assets of your business and reclaiming the security deposit to pay debtors, however, your assets or money will not be affected.
It is a fact that the formation of an own Limited Company will give your company a professional appearance. This can greatly help create trust and confidence in your services or products.
There are many big companies that won’t work with you if you are a sole trader, however they are willing to cooperate with you if you own an unincorporated company.
Better business financing
The process of funding your business using financing, credit and business loans is much simpler since you’re a limited business. You’ll find numerous options to obtain business financing and a lot of lenders will offer higher rate of interest and repayment conditions due to your limited business status.
Name of business protected
As part of the corporate formation process, your company identity will then be registered at Companies House and placed onto the official company register.
This means that once your company name is registered, it is protected under UK law, and nobody else is able to use your company name to conduct business under. In addition, no one is allowed to do business under a name considered as being too similar your registered business name, particularly if the business is similar to yours or is in the same sector of business.
This is fantastic because you’ll know that nobody is able to undermine your business’s reputation by pretending to be you and entice away customers or create direct competition in order to frighten customers and gain success of your hard work and accomplishments.
Options for Shareholders
If you are a sole trader you are able to set up your own limited business with only you as the director as well as the shareholder. In law, you only have to have a single shareholder in order to create an entity, so the fact that you are operating independently does not mean that you can’t create your own business.
Later on you might want to consider the issue of shares to help inject cash into your business. There are many kinds of shares and each class of shares will have its own rules and obligations. You are able to decide which voting rights the shareholders of your company have and how much power they are able to exercise within your business by drafting the shareholder agreement of your choice.
Contributions to pensions
A limited company is a legal entity it is possible for your business to pay an executive’s pension, and declare it an actual business expense. This means that you’ll gain an enormous tax benefit which isn’t available to the sole trader.
Let’s imagine you are faced with a tragic accident which causes your death or renders you unfit to work. If you are a sole trader you’ll know the devastation this could cause.
If, however, your business is registered as a limited-company, you could put in place a plan to transfer the ownership of your company to a third party.
If you decide to take a break, you may transfer those shares off to another shareholders or family members, so you can rest assured that the hard work you put into to build your business hasn’t been unproductive and will continue to grow when you’re gone.
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