Are you embarking on a new business venture as a self-employed individual or with a partner? Making the right choice for your business structure is crucial, as each option comes with distinct administrative requirements. To help you decide which is the best option for you, we’ve provided a useful comparison between being self-employed and trading through a limited company. There are three main business structure options available:
- Self-employed or sole trader
- Limited company
- Partnership
Self-employed
If you plan to operate your business as a sole trader or self-employed individual, you will need to register with HMRC as self-employed. Anyone earning over £1,000 annually from self-employment must register with HMRC and submit annual self-assessment tax returns. Furthermore, you must keep records of your business income and expenses, as you will pay income tax and national insurance contributions on your net profit through your self-assessment tax return.
Self-employed individuals pay income tax on their annual net profits (sales less expenses) and pay Class 2 and Class 4 national insurance contributions. Self-employed individuals are personally liable for the liabilities and debts of the business, although you can take out insurance to mitigate against this. HMRC has a handy calculator for estimating your PAYE and NI liability:
Budget for your Self Assessment tax bill if you’re self-employed – GOV.UK (www.gov.uk)
Limited company
Opting to run a business as a limited company does require registering with both Companies House and HMRC for corporation tax. Moreover, this business structure involves additional administration, which includes filing an annual return and submitting annual financial accounts to Companies House within 9 months of the financial year end. Additionally, you need to file an annual corporation tax return with HMRC, together with the tax payment also within 9 months of the financial year end.
From April 2023, companies with profits of £50,000 or less are subject to 19% corporation tax. Companies with net profits between £50,000 and £250,000 will pay a rate between 19% and 25%, depending on their profit. Finally, companies with net profits exceeding £250,000 pay 25% corporation tax. It is advisable to enlist the services of an accountant to prepare your financial accounts and calculate your tax liability.
Partnership
A partnership may be an appropriate business structure where there are two or more of you working in the business. All partners share responsibility for the business, including all bills and any losses. Each partner receives a share of the profits and pays income tax on their share of the profits through a self assessment tax return. Furthermore, the partnership needs to designate a nominated partner who will be responsible for submitting the partnership’s tax return and maintaining the business records. Furthermore, all partnerships need to be registered with HMRC.
Alternatively, a partnership can take the form of a limited partnership which needs to be registered with Companies House. Limited partnerships are required to have at least one general partner and one limited partner, with all partners paying tax on their share of the profits. As with limited companies, limited partnerships are liable for the bills and debts of the partnership, protecting the personal assets of the partners. Finally, to learn more about partnerships, click the link below for the gov.uk website which provides further information:
Set up a business partnership: Setting up – GOV.UK (www.gov.uk)
Comparison of self-employed and a limited company
| Self Employed | Limited Company |
|---|---|
| Less administration and easier to set up and close business. | More administrative requirements and various annual returns to HMRC and Companies House. When the company closes it must be liquidated. |
| Register with HMRC for self assessment tax (SA) and submit an annual tax return online. | Register the company with Companies House. Articles and memorandum of association are required on registration. An annual confirmation statement and annual financial accounts must be submitted to Companies House. Register with HMRC for corporation tax and submit an annual tax return (CT600). |
| The individual is liable for the debts and liabilities of the business. Both business and personal assets are seen as one. Can take out insurance to protect personal assets. | The company is liable for the debts and liabilities of the business. |
| All earnings (income less expenses) for a tax year are subject to income tax and national insurance in that year. | Earnings can be taken via payroll and as dividends. Net profits can be left in the company as reserves and withdrawn at a later date and tax year. |
| Pay tax as PAYE and class 2 and class 4 national insurance contributions. | Pay tax as an employee through payroll with deductions for PAYE and NI. Dividends withdrawn from the company are taxed via a self assessment return. The company pays employer NI and corporation tax is due on net profits. |
| Must keep records of income and expenditure. | Must prepare annual financial accounts that are submitted to Companies House. |
| Records are private and not publicly available. | Accounts and company information is publicly available on the Companies House website. |
