Should I be a sole trader or a limited company?
Posted on 5th May 2021
The easiest way by far when setting up a new business is to become a sole trader. You simply inform HMRC that you are now ‘self-employed’ and report back through the annual self-assessment process.
This is a great way to start off your self-employed journey, as it’s simple to set up. The costs of running a business in a sole trader capacity are also much smaller and don’t come with such an administrative burden.
By the 31st of January each year, you are just required to pay tax on your business’ profits via the self-assessment tax return system. Being a sole trader offers little distinction between you, the business owner, and your business.
In contrast, becoming a limited company is a much more complex process. One of the more challenging prospects with this option is that it comes with greater responsibilities. However, broadly speaking they can be more tax efficient as you pay corporation tax on the profit and only pay income tax on what your draw from the company. As a sole trader, you pay income tax on any profits made.
There is a lot more paperwork involved and by the end of the financial year you are required to prepare annual accounts, which are filed with Companies House along with a company tax return filed with HMRC.
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