So Entrepreneurs, I have been receiving quite a few questions lately on how to register as self employed – which is a sole trader – or limited company? and which would be the best option. This is quite an imperative part of your business, as you will need your company and yourself to be registered for tax and for #HMRC to be aware that you are your own company or self employed. Hopefully this weeks session will help you with any questions or confusion you have related to this topic.
There are a few different advantages and disadvantages to being a sole trader and limited company. Hopefully the information below will be able to assist you in your decision.
A limited company is its own legal identity, so as a shareholder your liability is limited (hence the name ‘limited by shares’).
As a sole trader, there is little distinction between you and the business. Any business debts become your debts and your personal assets – including your house – are not protected.
In a limited company, tax is deducted from directors’ salaries via PAYE and paid at regular intervals to HMRC. All directors are also obliged to complete a tax return unless you received absolutely no pay or benefits; irrespective of whether any tax is owed. If applicable, higher tax rate is paid by shareholders on dividends under the self-assessment regime. Corporation tax is payable 9 months after the year end, by filing a company tax return.
Sole traders pay tax on their business profits, after expenses have been deducted, via the self-assessment tax return system. The deadline for online tax returns is 31st January after the end of the tax year.
Within a limited company, both employer’s and employee’s National Insurance (NI) is payable on directors’ salaries and bonuses. This NI charge is greater than that paid by a sole trader/partner, who pay Class 2 NI contributions of £2.80 per week and Class 4 contributions dependent on profits in excess of £8,060 (rates accurate for 2015/16).
Profit and Loss
For limited companies of any size, corporation tax is charged at 20%. For a sole trader/partnership, profits are taxed at 40% on taxable income in excess of £31,785 and 45% over £150,000 (rates accurate for 2015/16).
In a limited company, losses can only be carried forward and set against future profits or set against the previous year’s profits. For sole traders, losses can be set off against other income in the same tax year, carried back to previous years or carried forward.
A limited company must prepare annual accounts (also known as ‘statutory accounts’) from the company’s records at the end of the financial year. These are to be filed with HMRC as part of your tax return as well as sent to all shareholders and Companies House. A limited company must also file an Annual Return to HMRC, which includes information about the directors, shareholders and registered office.
Sole traders/partners are not legally required to have annual accounts to or file accounts for inspection. However, a record of business expenses and personal income are required for tax returns.
An incorporated company, whilst not guaranteeing reliability, gives the impression of a soundly based organisation and may appear more credible. In certain sectors, contractors or agencies may not work with sole traders because of the legal protection a limited company provides.
Before you start
You can register for:
- Self Assessment if you’re a new sole trader or the ‘nominated partner’ in a new self-employed partnership
- Corporation Tax if you’ve set up a new limited company
- PAYE for employers if you’re taking on staff
- VAT as a new business
How to register as self employed
Tell HM Revenue and Customs ( HMRC ) you want to be a sole trader by registering as a new business. You’ll register for Self Assessment tax returns and Class 2 National Insurance at the same time. You’ll then be able to report your self–employment income through a tax return after the end of each tax year. Follow the link below
https://www.gov.uk/new-business-register-for-tax once you follow that link, click on start now and follow the instructions.
How to register as Limited company
- the company’s name and registered address
- names and addresses of directors (and company secretary if you have one)
- details of shareholders and share capital
Follow the link provided below to register.
If you are finding difficulty, there are on line agencies to assist you that cost the same price surprisingly. The questions can be quite confusing I found, but I might just be a bit slow with these things:)
I hope I have been of some assistance with registering your company, it is a bit of a tricky one.
I would advise you to get an account from the very beginning and keep a record of all your expenses and receipts on a weekly basis.
Podcast: So because this is a very random topic, I am suggesting a random podcast. It is basically everything that is wrong with the world, but good that we get people aware of it. It is a podcast by The inquiry, called “Why aren’t more dishonest bankers in jail?”. Really good!
Inspirational Quote: Life is so much brighter when we focus on what really matters.
Business is great, exciting, challenging and adventurous. But never forget the people you love and the things you love doing. Business should be done for inspiration, so that we can eventually spend more time with the people we love and do the things we love doing. Never forget what is important when you are stressed out and things become hectic, as they will. There will be loads of ups and downs on your journey. It is important to never forget what truly makes you happy. A successful business is at its best when the owner is happy in every aspect. Don’t forget to breath, balance is very important in the journey to success.