Before you even start trading it is worth getting to grips with the many differing legal ways in which to operate, each differ in their own way but have unique advantages (or disadvantages. Read this guide to get an overview of 2 different types of business and see how our calculators can help you speed up the decision making process.
By opting to be a sole trader, or 'self employed' you are effectively 'the business'. In a purely legal state you are responsible for all actions of the business and debts personally.
Even though it is referred to as sole trader, that just means you have sole liability. So you can have staff working for you.
All debts and liabilities of the business are personally against you - and should the business fail to honour these, you can be chased for them.
In terms of paperwork, you need to keep records of bills, expenses, and income and create accounts to file a Self Assessment Tax Return annually.
The business will have to pay Income Tax and Class 4 and Class 2 National Insurance Contributions on profits. If you have staff, then employers' contributions and PAYE record keeping would also be required on any salaries.
If you have two or more key people in the business, you could consider running as a partnership, where each partner would have a share of profits to pay their taxes on - liability can also be spread between partners, although a creditor can pursue each partner individually.
A limited company requires the formation of a company with a director or directors to be responsible for the running of the company's affairs.
It is very popular to incorporate due to the legal and taxation flexibility and efficiency.
The limited in Limited Company means limited liability, where unless due to gross misconduct, company actions and debts are limited to the company and individual directors cannot be liable for them, even if they hold shares.
Due to this unique structure, profits, equipment/stock/assets of the business belong to the company as a separate entity from the directors. In order to get money out of the business, the company must provide employee salaries or declare dividends on any profits to shareholders.
The ability to pay dividends is one of the main advantages, as dividends do not attract National Insurance Contributions and can represent a significant tax saving.
A partnership can be set up as a limited liability partnership, but this only stretches to liability and does not provide the ability to withdraw profits as dividends.
Calculating the differences
We provide two calculators to help figure out how much money you can keep from your business:
- Dividend versus Salary to check the differing taxation between tax on profits generated in a dividend, employee and sole trader scenario.
- Small Business Tax Planner is a more in-depth tool but allows you to calculate the total profit and associated corporation tax. You can add multiple employees and multiple dividends to get a take home profit figure.