Company structure: Sole Trader, Partnership or Limited Company?

Answer

There are pros and cons with both and which you choose will depend on your objectives. Have a read of our Sole Trader vs Limited Company post for a fuller discussion.

Tax used to be a real driving factor behind this decisions (LTD's were tax advantaged) however, successive Budgets have aligned the treatment.

If you are planning to extract all the profit from the business each year, then the most tax efficient structure varies based on the level of profit. You can see for yourself how this works by downloading our tax calculator for 2020/21.

If you are looking to grow your business, the liability protection and greater cash flow flexibility of a Limited Company tends to be of more importance. This is because a Limited Company's profits are taxed at 19% whereas a Sole Trader is taxed on profit as income tax (which for higher revenues results in a higher tax rate, however the money is now yours, taxed). So, a Limited company therefore has more cash it can use to fund growth (assuming your effective personal tax rate is higher).

The last main consideration is subjective: certain businesses prefer to deal with Limited Companies. Being a Limited Company (and a VAT registered one to an extent) signals that your business is more professional and more likely to be a long-term partner.

As a guide, below roughly £200k annual revenue, the split is 50:50, and after this point most Sole Traders would incorporate so there are very few Sole Traders still active above this level.

Timing does also play a part: starting a Sole Trade late in the personal tax year means that you will pay for full Sole Trader tax return even if you were only active during part of it, whereas for Limited Companies, the tax year is based on when you set up your business.

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