One of the first decisions you’ll need to make when starting up your own business is whether you want to operate through your own limited company or as a sole trader.
Both options have their advantages and disadvantages, so it pays to consider both options before deciding which one will work best for you.
If you form a limited company, there’s a good chance you’ll take home more of your earnings than you would as a sole trader. This is because you can pay yourself a low, tax-efficient salary and boost your income by dividends. Dividends are payments made to company shareholders after corporation tax has been paid and they’re taxed at a lower rate than salaries. As the only shareholder in your business, this gives you the freedom to decide how much of the business’s profits you want to take out – and pay less in personal tax.
Also worth bearing in mind is that, post Brexit, our government is hinting that it wants the UK to have one of the lowest rates of corporation tax in Europe. The idea is to make this country an attractive base for foreign businesses – but you’ll benefit too if you open a company in the UK.
How to form a company
Setting up a limited company is simple and can be completed in just a few steps using Smarta Formations. Below are the steps and information you'll need to complete your company registration:
That’s it. Within a day or so, you’ll receive your Certificate of Incorporation.
Setting up a limited company is not for everyone. You’ll have to complete an annual Companies House return, which means your annual accounts will be publicly available and you’ll have legal responsibilities as a director. It also means completing an annual corporation return as well as your personal return.
Working as a sole trader is, from a bureaucratic point of view, a far simpler option. There’s no company formation process and no annual administrative obligation other than your self-assessment tax return. You simply call HMRC and tell them you’re working as a sole trader. It also means, of course that all your profits will be subject to the standard rates of income tax.