Reader’s question: I am about to start working for several companies as a self-employed transport consultant. Which would be better for me limited company or sole trader?
Experts answer: The expert for this readers question is John Baird from Scotland Debt Solutions.
Operating through a Limited Company is a popular option for consultants as it is a tax-efficient way of running a business and offers a high level of control, protection and credibility.
Limited liability protection
The main reason you may wish to operate as a limited company, as opposed to a sole trader is the benefit of limited liability protection. As the limited company is a separate legal entity, you will not be held personally liable for the debts of the business, also known as limited liability protection. This means that if the limited company was to become insolvent, you would not be held personally responsible to repay the company’s stakeholders.
However, as a sole trader, you would be held liable to repay the debts of the company as there is no legal distinction between yourself and the business.
What are my tax obligations?
From a tax perspective, if you operate through a limited company, the business will be liable to pay Corporation Tax on any profits generated and you will pay tax on the dividends you withdraw from the company (dividends are taxed at a lower rate of tax than salary payments).
When operating as a sole trader, you will pay tax on all profits generated that exceed £12,500; the personal allowance for the 19/20 tax year.
Advantages and Disadvantages
One of the downfalls of operating through a limited company is the increased administrative burden and the directorial responsibilities of submitting accounting records to HMRC. This includes the requirement of producing annual accounts each year, as well as a Corporation Tax return, whereas a sole trader is not obliged to produce these.
Generally, operating through a limited company is a tax-effective way to operate, however, the IR35 status of your engagement(s) could mean that the tax advantage of drawing dividends as opposed to a salary may no longer be an option, therefore negating the tax advantage of operating through a limited company.
As you will be providing consultancy services to several companies, it is important that each engagement is reviewed for IR35 status. If you anticipate that you will be operating outside the confines of IR35, then working through a limited company would mean that you enjoy lower tax rates and higher take-home pay. If you expect to start a contract post-April 2020, take note of the IR35 reform in the private sector which shifts the responsibility for determining IR35 status away from the contractor to the end client. This only applies if you’re working on a private-sector contract for a medium or large business, following April 6 2020.
It is advisable to speak to an accountant to discuss the best route for you, taking into consideration the nature of your contracts and mitigating factors.
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