Small Business Start-Up Sole Trader Or Limited Company?

Setting up a new business is straightforward as a sole trader. You need to inform HMRC and complete form CWF1 to register as self employed. You also need to register for Class 2 National Insurance contributions by completing form CA5601. You must register within three months of becoming self-employed otherwise you could be fined. You also need to file an annual self-assessment form so need to keep records of all spending and income from day one. You are taxed as a sole trader which could be as high as 50% for those earning £150k or over. Interestingly you do not need to have a business bank account but it is preferable.

Starting up as a limited liability company can bring both financial and legal benefits. It gives the founders’ the protection of limited liability, some customers expect it and incorporation tax for small businesses is set to fall to 20%. To set up as a limited liability company you need to chose a name and register it at Companies House. Most founders chose to do this by buying a firm off the shelf from their accountant or formation agent for around £200. It is possible to register a company yourself for £20 by completing form IN01 and filing a memorandum and articles of association but this is more complex for the novice. Next Companies House will inform HMRC that your business has incorporated and you will be sent form CT41G to register for Corporation Tax. Company directors are responsible for keeping records and calculating their tax liability, which must be paid no later than nine months and one day after the company’s year end. Limited companies must have a business bank account

Author – Paul Stanford

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