Set up business as a limited company or remain a sole trader?

A frequently asked question is should you set up as a limited company or remain a sole trader. Unfortunately, there is no quick and easy answer to this question. It really depends on your individual circumstances…

In general, it makes sense to begin trading as a sole trader. The costs are lower for establishing this type of legal entity. Any available cash can be spent on getting your business up and running. Further down the road, as you become established and are making more money, it may be beneficial to trade as a limited company.

However, in certain circumstances, as a startup, it can be advantageous to setup as a limited company. Funding or grants may be available to you trading as a limited company that may not be available if you remain a sole trader. Also, if you had (or have) another stream of income, e.g. PAYE employment and you’re investing in your business then incorporating may be the best solution to minimising your tax bill.

Things to consider if deciding whether to incorporate

In order to determine the best legal entity for you there are a number of questions that you need to ask. The answers to these questions will point to areas, and further questions, that you need to investigate. Identify under each area which specific advantages or disadvantages of setting up business as a limited company or remaining a sole trader are relevant to you.

The questions are grouped into three categories…

1, Are you a startup? If yes, consider the following

  • Current employment status
  • Type of business
  • Investment requirements              

2. How much is your current income?

  • Do you spend it all or can you save more?
  • Maximising tax saving across the family
  • Carrying forward losses

 3. How you can plan to finance your retirement?

  • Pension
  • Extracting profits
  • Capital gains tax

As a startup it will matter whether you have previously been unemployed, were in PAYE employment, or plan to work full time in the business. Depending on your individual circumstances there may or may not be funding available to you or the opportunity to claim tax relief.

If you’re currently in business as a sole trader you will want to use up any losses carried forward before you incorporate. Otherwise, you could lose the benefit of these losses. If you’re profitable are you minimising your tax liability? There are increased costs associated with becoming a limited company but these may be more than compensated for if you can decrease your tax bill.

The opportunities available to a limited company for pension planning are far more favourable than if you remain a sole trader. This is a big advantage to incorporating – if you have excess profits in your business over and above what you need on a day to day basis.

These are some of the main areas to consider if you are wondering whether you should set up business as a limited company or remain a sole trader. It is an overview and each of these topics will be considered in detail in a series of future posts. Please check back to the blog.

If you would like assistance in any of these areas please visit our services or contact page.

Share Post:

Share on facebook
Share on twitter
Share on linkedin

Have Any Questions?

Get in touch through the contact page or using the details below.

Recent Posts