Here is a quick guide to the differences but please contact us for a more indepth discussion about your options and what’s best for your particular circumstances.
|Legal StatusFor the sole trader, there is no barrier between the individual’s business affairs and their private affairs. This means that the individual’s non-business assets may be at risk if the individual’s business fails or experiences difficulties. The partner is in a similar position as a sole trader as the partner is jointly liable with the other partner(s) for the partnership’s debts. It is possible to limit the individual’s liability; for example, by using a Limited Liability Partnership (LLP).
|The liability of a shareholder in a limited company is limited to the amount invested by that individual in the share capital of the company. This protects the shareholder’s other assets – for example, his/her home – in the event that the company is wound-up.The benefits of limited liability may be reduced where the shareholder is required to give a personal guarantee to a creditor of the company (for example, a bank in respect of borrowing by the company).
|Taxation of Profits
The sole trader pays income tax and Class 4 NICs in respect of their profits as they are earned. As a rough guide, the combined rates of tax and NICs for profits are: from £8,632 to £12,500 – 9%;
£12,500 to £50,000 – 29%;
£50,000 to £150,000 – 42%,
and above £150,000 is 47%. The partner pays income tax and Class 4 NICs in respect of their share of the profits of the partnership. This is on the same basis as the sole trader. This is also the case for the partner in a LLP.
The company pays corporation tax (CT) on its profits as they are earned. The current rate of corporation tax is 19%; this is expected to fall to 17% from April 2020.A second layer of tax is payable when the business owner withdraws some or all of the after-CT profits from the company. There is a degree of flexibility as to how and when the profits are paid to the business owner. This can give the limited company an advantage over the sole trader/partnership.
|LossesThe sole trader and partner may set a loss realised in the trade against their other income or gains for the current or previous tax year. In the first 4 years of the business, this relief is extended so that losses may be carried back three years.
|It is not possible to set a loss realised by the company against the business owner’s income.
The sole trader must register with HMRC and from then on, submit a tax return each year. For small businesses, only three figures need to be returned to HMRC: income, expenses and profit/loss. Also, it is possible to calculate the tax liability by reference to cash received and paid out.It is advisable for the partnership to have a formal Partnership Agreement setting out the basis on which the partnership will exist. An annual tax return is required in respect of the partnership. The partner records his/her share of the partnership’s profits or losses – as set out in the partnership’s tax return – in their tax return.For these purposes, a LLP is treated in much the same way as a company (see across). A partner in a LLP records his/her share of the LLP’s profits/losses in their tax return.
The company must be registered with Companies House. A company must prepare statutory accounts in the format prescribed by the Companies Acts, and those accounts must be filed with Companies House.Further, a company must complete a Confirmation Statement each year and it must notify Companies House of certain developments, such as the appointment of new directors. The company’s accounts, etc. may be viewed on GOV.UK by members of the pubic. The company must submit an annual tax return to HMRC, including supporting calculations. The shareholder records on his/her personal tax return any income received from the company.
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