Sole trader or limited company? What should I choose?

Sole trader or limited company?

We are often asked to advise clients whether it’s more advantageous for them to set up their new businesses as a sole trader or limited company.

The risk argument is fairly straight forward.

If the trade or service you provide involves risk, and a risk that it is difficult to fully insure against, then the limited company is the better route. The only assets at risk will be those owned by your company. Provide you don’t do anything illegal then your personal assets will be safeguarded should the business fail.

If there is no significant risk, the next criteria to look at is taxation.

Which route will generate the lower tax and NIC bill whilst still providing you with sufficient take-home pay?

In situations where taxable business profits remain fairly low, up to say £20,000, it is usually more sensible to structure your affairs as a sole trader, as any perceived tax benefit will likely be offset by the increased costs involved in setting up and running a limited company.

Above that, where profits are say between £20,000 and £200,000, you will generally be in a position to save tax and NIC by trading as a limited company but when profits exceed around £200,000 the table turns back and you may be better off as a sole trader.

However, these assumptions would only be valid if you were to choose to withdraw all your profits from your business. Most businesses will grow to the point where an ever increasing percentage of the profits are retained in the business which is another big factor in deciding how best to structure your business.

There are a number of other factors to consider though when looking at this question, so if you are contemplating a new business venture and you are unsure what structure you should choose, please call so we can look at all the options and advise you on the best way to go.