Limited Company vs Sole Trader. Which is better?

one of the most common questions I get asked is should I set up my business as a limited company or as a sole Trader on one hand you might think that a limited company is the best option for you because it provides protection to your assets and means you can scale on the other hand you may believe that a sole Trader is better because it's far less hassled to set up and it can mean you pay less in tax making the right decision can be one of the most important things you can do when starting out so in this video I'm going to be talking about the key differences between both of these structures the advant an ages and disadvantages of each and at what point you should consider switching from one to the other if you're new here I'm Nischa I'm a qualified accountant and this channel is all about personal finance Building Wealth and self-development let's get into it when you first set up a business you need to choose a structure and the two basic ones to choose between a soul Trader and a limited company so what's the difference at the basic level as a soul Trader you are the business so say you are a personal trainer you're doing onetoone sessions with people and they pay you for it this is you and this is also your business is an extension of yourself and your personal name represents your business this means that all your business dealings invoicing contracts are done under your personal name one of the advantages of setting up as a sole Trader business is that the process is super simple and low cost you just need to a track your earnings and expenses over the year and B at the end of the financial year complete a self assessment tax return quick easy and noow cost and so it's a very attractive option to start with in most cases there are however some clear exceptions where this is absolutely not the way to go and I'll come to that in the text part of the video now a limited company is you operating under a separate legal entity from yourself so this is you a personal trainer and you set up a company Pilates limited let's call it minus 10 points for lack of creativity you register your company with company's house and that company or the business is very separate from you as an individual you may own the company so you can be a director or a shareholder in it and you can have multiple directors and shareholders in it as part of the business it's a separate legal entity to you and the company does all the business so the invoices the contracts all of that is under the company name setting up a company has also become very very quick and very easy to do but when it comes to the tax returns that's when it gets more complex you'll need to do a tax return both for your company and for you personally and so the extra paperwork and the tax rules to follow that come with having a company come with an extra cost and it's a lot more expensive to do your accounts company than it is as a soul Trader basis okay so now we've covered the high level difference between a soul Trader and a limited company and the difference in the structures now let's talk about the advantages and the disadvantages for each of these and when to use which one before I get into it I want to give a quick mention to today's sponsor Dropbox as a business owner managing different aspects of a business can be overwhelming there are hundreds of moving parts and things to keep on top of no matter what industry you're in for me I had to make sure that the different people in my team were always aligned regardless of where in the world they're working from I speak to loads of Brands I need to make sure that my lawyer has a latest version of an agreement all the files were saved in the right place we had so many apps and systems that we kept switching between then we came across Dropbox business and business plus which has simplified the entire process instead of paying for various subscriptions and tools we just have Dropbox where we can handle everything in one centralized location and it's more cost effective and saves us a lot of time I love the E signatures capability so being able to prepare send sign contracts ndas and any other necessary paperwork from anywhere and my personal favorite Dropbox capability is replay I can give real time exact timestamp feedback add markups and leave comments for my Editor to look at and amend straight away by centralizing all of our most important tasks we're no longer wasting time jumping from app to app if you're looking for an all-in-one solution to organize your professional life I'd highly recommend checking it out you can click the link in the description to learn more about Dropbox business now onto the tax implications the way the tax is structured for a soul Trader and a company can make all the difference in which one you choose let's use an example of earning 100,000 after all your expenses for a soul Trader this would be taxed just like income tax because you are the one getting paid so you get your personal allowance and you can utilize that assuming it isn't already used up through any of your other income sources so the first 12,570 in this case at the current time is taxfree the amount you earn above that is taxed at a progressive tax rate so the amount you earn after 12,570 up until 50270 is taxed at 20% and then the remaining amount between 5271 and 100,000 is taxed at 40% I have a video linked over here that goes into the details of how the progressive tax system works in more detail but you can also check that out after this video but bear in mind you also have to pay ni on this as well for corporation tax it's structured slightly differently and you might be thinking how do I get paid well the company earns money and then it can either pay you a monthly salary on which you have to pay income tax and National Insurance so the same rates that you had in the soul Trader example or you can get paid via dividends Dividends are the payments the that have a profit of between 50,000 and 250,000 is 25% minus any marginal relief so to keep this simple for the calculation and to be conservative I'm going to keep the main rate at 25% so you'll be paying 25,000 in corporation tax as you can see it might make sense to start off as a soul Trader early on so you can utilize the tax-free income allowance and the lower income tax brackets but the tax bracket after a certain threshold very quickly becomes much higher for a soul Trader than the highest bracket for a corporation tax so with that in mind it might make sense to consider switching because you could save a significant amount of taxes after a certain rate the other thing to consider is as a soul Trader you get some other tax benefits for instance first year losses can be used to reduce any other tax that is due that year so you might even get a refund but at the same time with a limited company you can write off more things as expenses so you're lowering your profit and subsequently lowering the tax that you owe I'