Self Assessment Tax System >> Sole Trader or Limited Company?

Tags: starting business, pension funding, self employed

The first question to be considered is whether you carry on business in your own name, i.e. Sole Trader or through the medium of a Limited Company.

As a Sole Trader you are personally liable for all the debts of your business. If the type of business you are engaged in leaves you open to be sued for substantial damages in the event of errors or mistakes then you should consider trading through a limited company.

To illustrate the point consider the position of a plumber who installs central heating systems. If the boiler subsequently blows up serious damage could be caused. This plumber should trade through a limited company to avail of the limited liability status of a company so that his personal assets are not exposed in the event of business failure. On the other hand a selfemployed painter is unlikely to require limited liability to the same extent as the plumber.

For Administration purposes a limited company involves more ‘red tape’ as the company has to make its own tax returns and returns to the Companies Office. On the positive side, if the business is going to make substantial profits in excess of your own salary requirements then these profits will be taxed at the 12.5% tax rate as against the top 55% rate for a sole trader.

In addition pension funding rules can be better for a company as compared to a sole trader. It is important to consider this matter in detail and if in doubt seek professional advice. We can provide this service on a consultancy basis for which an extra charge will arise. 

The three year tax exemption for new limited companies should be considered. This is explained in more detail in Section 4 below. 

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