Business start up

You are thinking of a business start up – there is one BIG question to answer:

Business start up – should it be a Limited Company or sole trader?

business start upThere are some clear distinctions between the two, and it will pay to think carefully before you take the plunge.


Limited company

Sole trader

Directors’ salaries are paid through PAYE, with tax, NI deducted when the salary is paid. Sole trader’s drawings are not taxed.
Employee’s Class 1 NI is paid at a higher rate than self-employed contributions. Self-employed Class 2 NI is paid at a flat weekly rate whatever the size of your profits.
Employer’s NI is paid on directors’ salaries by the company. No employer’s NI is paid by a sole trader on his/her profits or drawings.
Company profits (after deducting directors’ salaries) are liable to corporation tax.  This may be taxed at a higher rate than income tax. Profits are taxed at income tax rates.  Class 4 NI is also due.
Many company perks are liable to income tax and NI. Perks are treated as drawings and are not liable to tax and NI.
Dividends can be paid. These can save tax and NI, though HMRC can prevent certain types of dividend planning. Dividends only apply to companies and not to sole traders.
Company money is distinct and separate from your own.  Money can only be taken as salary, dividend or reimbursement of legitimate business expenses.  If you take other money from the company you may be breaking the law. There is no legal distinction between money belonging to the business and personal funds.  However, accurate accounting records should be kept which record all business transactions.
Some tax reliefs are only available to limited companies, such as for R&D, goodwill and intellectual property. Sole traders cannot claim these tax reliefs.
As a director (and therefore an employee), you are entitled to benefits such as statutory maternity/ paternity/ adoption pay, JSA and state second pension. Sole traders are not entitled to the same state benefits as employees because they pay NI at a lower rate.
Tax relief is available to private investors under the enterprise investment scheme (EIS) and the seed enterprise investment scheme (SEIS). No tax relief is possible under these schemes.

For a business start up, it is crucial to make the right decisions at the outset. A limited company is easy to set up, but more difficult to close down. Similarly, deciding on how best to manage the business’ books should be done very early in the process – please talk to us to get advice, free and without obligation.

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Business start up