| Sole Trader or Partnership |
Limited Company: you are director & shareholder |
| The trader and company are the same legal entity. |
The LTD is an entirely separate legal entity. |
| The sole trader is the business owner. |
The LTD director is a shareholder who holds all or a portion of the company’s capital. |
| The sole trader is also the proprietor or business manager. |
The LTD director serves the company as an officer, just like the treasurer or secretary. |
| Sole traders are held personally liable in the event of litigation unless appropriate insurance is in place. Such insurance usually covers product and service liability, employer liability, personal indemnity, etc. |
Limited companies, as legal entities, are held liable in the event of litigation. It is both rare and extremely difficult in the UK to directly suit LTD directors or officers except in certain qualifying cases. For example, directors and officers may be held responsible for:
- Director or officer-perpetrated fraud, including tax fraud
- Criminal activity, like corporate manslaughter
- Violations of health, safety, and environmental rules
- Deliberate concealment of offences committed by directors or officers
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Employment
- Sole traders are treated under the law as self-employed. A sole trader cannot be his or her own employer.
- Sole traders are included under proposed anti-avoidance provisions intended to end abusive tax arrangements.
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Profits and Taxes
- Sole traders pay Class 2 and Class 4 National Insurance and income tax on all business profits.
- Partners pay the same, but only on their share of profits.
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Profits and Taxes
- LTDs pay corporate income tax on all taxable profits. Corporate income taxed is lower than the personal income tax paid by sole traders.
- Company officers and employees are subject to individual income tax, NICS, and PAYE.
- Income tax is assessed on dividends earned by shareholders.
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Business Losses
- Business losses are counted against your total income.
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Business Losses
- Business losses offset company income but not the individual income of officers, directors, and employees.
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Business Gains
- Gains may be withdrawn as cash with no effect on taxes.
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Business Gains
- Gains withdrawn from an LTD are taxed as dividends if paid as distributions, or subject to NICS and PAYE if paid as earnings.
- Generally speaking, employee benefits received by directors and their families are taxable.
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Borrowing
- Sole traders’ business bank accounts are their own; they can borrow from them.
- If withdrawals result in account overdraft, tax relief relating to bank charges and interest are restricted on any amounts counted as part of the overdraft.
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Borrowing
- Under the Companies Act 2006, company directors may borrow from LTDs. Tax liabilities are as follows:
- The company pays a 25% charge.
- The director will be assessed a tax charge if the loan is provided interest-free.
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Pensions
- Sole traders are only eligible for personal pensions.
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Pensions
- LTDs can offer more generous company pension schemes with more benefits and fewer limits.
- LTDs can hold company assets in a SIP, SAS, or other unapproved pension scheme.
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Insolvency
- Sole traders facing insolvency are personally liable for all company debts; the same holds true for partnerships.
- Both sole traders and partners can face bankruptcy in addition to insolvency.
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Insolvency
- A failing LTD limits the liability of directors to the unpaid shares they possess except when a director personally guarantees company borrowing.
- Directors of failed companies assume personal responsibility if they continue trading even after insolvency; this could result in personal bankruptcy.
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Accounts
- Sole traders are not required to prepare accounts for tax purposes. Doing so may still be a good idea for keeping track of business finances, debt collection, profit and loss, etc.
- Keeping annual accounts including a balance sheet may be necessary for personal tax purposes.
- A basic accounting format is available for sole traders operating below the VAT threshold.
- Sole traders do not submit accounts to HMRC except in cases of official investigation.
- Generally Accepted Accounting Practices are used to figure taxable profit for the Assessment, unless cash accounting is being used.
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Accounts
- Under the Companies Act, LTDs must prepare annual accounts that are filed with Companies House.
- Full accounts for corporation tax must be prepared and submitted online to HMRC.
- All accounts must be prepared using accounting standards.
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Sale of the Business
- Any profits realized through the sale of the business or its assets are taxed under capital gains tax rules.
- Disposal of business assets or a partial interest in the business may also be taxed as capital gains.
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Sale of the Business
- The sale of an LTD or its assets results in Corporation tax on any profits as well as taxes on shareholders for any distributions or proceeds they might receive.
- Tax rules sometimes make it more beneficial to sell the shares of an LTD rather than the business itself or its assets.
- Company shares can be given to others as gifts.
- A company director owning more than 5% of an LTD may qualify for less costly capital gains tax on gains of up to £10 million.
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Death of Trader
- A sole trader’s business ceases at the point of death. The business can be passed down in all or part.
- Any business that is a qualifying trade will also qualify for business property relief for inheritance tax purposes.
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Death of Director
- An LTD continues to exist even after its director dies.
- Unless an LTD engages primarily in investment activities, its shares qualify for business property relief for inheritance tax purposes.
- Inheritance tax relief does not apply to any outstanding loans made to a deceased director.
- Any director assets held outside of the LTD qualify for 50% business property relief.
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Sole Trader Pay
- Sole traders can withdraw any amounts as personal income. For tax purposes though, the law does not consider such withdrawals as employee pay.
- Any monies paid to a spouse or family members as salary must qualify under tax law as commercially justified.
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Director Pay
- LTD directors are not restricted in the amount of salary they receive. All money paid as salary is subject to NICs and PAYE.
- Any monies paid to a spouse or family members as salary must qualify under tax law as commercially justified.
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General Expenses
- Expenses incurred wholly and exclusively for the purposes of trade qualify for tax relief.
- Expenses for which only a portion are incurred for the purposes of trade qualify for tax relief of that portion.
- The remaining portion under the previous example must be accounted for with a ‘private use’ adjustment for taxes.
- Common private use items include things like telephone, utilities, and vehicle operations.
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General Expenses
- Expenses incurred wholly and exclusively for the purposes of trade qualify for tax relief.
- Personal expenses incurred through the company are treated in one of two ways: they are considered earnings if incurred by directors and distributions if incurred by shareholders.
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Cars and Fuel
- Sole traders and partners are eligible to claim capital allowances on a car, but only up to that proportion used wholly and exclusively for business purposes.
- Sole traders are not eligible for fuel benefit adjustments. However, they can disallow a proportion of fuel costs relating to personal use of a vehicle.
- Family members and the sole traders’ payroll may benefit, for tax purposes, by driving low emission cars.
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Cars and Fuel
- LTDs are eligible to claim the full capital allowance on company cars regardless of personal use by employees.
- Company cars can be offered as benefits in kind, but doing so can be expensive depending on a vehicle’s list price and omissions.
- LTDs can reimburse directors and employees for company use of personal vehicles. This is sometimes cheaper than running company-owned cars.
- Low emission cars may be more tax efficient for both LTDs and director family members who are on the payroll
- Though LTDs can reimburse company car drivers for a fuel expenses related to business mileage, it is not advantageous for tax purposes to reimburse for personal mileage.
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Mobile Phones
- Because mobile phones are subject to private use, the government expects a tax add-back on the sole trader’s tax return.
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Mobile Phones
- Mobile phones can be provided tax-free to LTD employees and directors if contracts are in the company’s name.
- Only one tax-free mobile phone is allowed per household.
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Computers
- Capital allowances are allowed for business computers; the ad-back allowance may apply on any computers with substantial personal use.
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Computers
- LTDs can provide company computers tax-free to directors and employees if said computers are required to effectively fulfil individual duties.
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Tax-Free Benefits/Incentives
- N/A to self-employed sole traders and partners.
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Tax-Free Benefits/Incentives
- LTDs can provide a variety of tax-free benefits and incentives to directors and employees. They are eligible to receive tax relief on the cost of providing said benefits and incentives.
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Home Work
- Sole traders maintaining an office at home are eligible to claim a deduction for light, heat, and rates.
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Home Work
- LTD directors are eligible to claim up to £4 per week for work-at-home expenses without providing receipts.
- LTD directors can be fully reimbursed by the company for light and heat if working from home. Council tax and mortgage interest cannot be reimbursed.
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Rent Charges
- Sole traders cannot charge themselves rent for business use of a home.
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Rent Charges
- Company directors may establish a licence between themselves and their LTDs for the purpose of establishing a home office or using other space in the home or outbuildings for work purposes. Doing so allows the director to recharge a proportional amount of Council tax and mortgage interest.
- Any amounts realised from such licences must be declared as rental income under Self-Assessment tax rules.
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