A sole trader is a self-employed individual who enlists a business with HMRC. As a sole ownership, you may hire other people but you will completely be in charge of the business as well as its liabilities – there exists no lawful difference between you and your company. It is necessary you register for Self-Assessment, pay Income Tax and National Insurance Contributions on every taxable income and file Self-Assessment tax returns.
A limited company is a form of business structure, which is registered with Companies House. It is a different legal entity that is totally separate from its owners and thus liable for its own debts and finances – the owners of the company profit from reduced financial liability for business debts in the form of limited liability.
The majority of the companies are limited by shares and owned by subscribers (shareholders). Some companies are limited by guarantee and owned by guarantors – this is a typical structure for non-profit organisations whose owners never take a part of the company’s profits. Limited companies are managed and controlled by at least one director, who may or may not be one of the company owner(s).
It is not necessary. Registering with Companies House as a sole trader is only required should you are establishing a Limited Liability Partnership (LLP) or a limited company. To function as a sole owner, you need to be registered with HMRC for Self-Assessment. This is a really easy task that can be completed online in just few minutes by supplying the details below:
Sole proprietors pay Income Tax on every taxable profit while limited companies pay corporation tax on every taxable profit. Based on the amount of profit your business makes, a limited company could be more tax productive due to the fact that corporation tax is presently set at 20% on every business profits, while Income Tax rates differ from 20% (about £31,785 yearly income), to 40% (£31,786 – £150,000) and 45% (income more than £150,000).
By running your business as a company, you can minimise your NIC and Income Tax by taking the salary of a director up to your Personal tax-free Allowance of £10,600 or the NIC threshold of £8,060 (2015-16 tax years). The remaining part of your income can be taken as bonus payments.
It is possible to change your sole proprietor business to a limited company in as a little as 3 working hours by forwarding an online application to Companies House. All you need do is to enter the information below into the registration form:
Several limited companies and sole owners are not legally mandated to take out any form of insurance except they hire people, in which case worker’s Liability Insurance is needed. Nonetheless, we strongly suggest that businesses safeguard themselves from injury claims and property damage by taking out public liability insurance.