Should I set up as a sole trader or limited company? Dave Fishwick replies

I just started my consultancy business after working in another company for a few decades. It’s a tough time, but I’m confident I’ve saved enough and built my network to get me through these tough times.

However, I’m not sure if I should set up a sole proprietorship or a limited liability company. What is the difference between the two?

If I set up a limited liability company, do I have to pay myself dividends to lower my tax burden? And on which is the best to declare the costs? I work from my home office, so my expenses are smaller.

Dave Fishwick, the business doctor of This Is Money, replies: There is no universal answer to whether it is better to be a sole proprietor or a limited liability company.

The decision depends on, among other things, the expected income of the company and your circumstances. Advice should always be sought from a qualified accountant on specific accounting matters.

You say you’ve saved quite a bit and have a lot of contacts, and personally I think this is a great way to start a business.

You will have enough money to pay the bills while having the chance to deal with all the initial issues and challenges you will inevitably face.

I also like the fact that you are confident in your abilities. Confidence and confidence are incredibly important when starting a business or new challenge in life.

Try not to worry too much that everything is absolutely perfect from day one.

As a general guideline, you should consider starting as a sole proprietor until you have a better idea of ​​your current income level. The business should be cheaper to run and you can always set up a limited liability company at a later date.

Accounting fees are generally higher in a limited liability company because there are more rules to follow.

Limited liability companies are taxed independently of their owner and there are tax benefits when profits are higher.

As your income rises, you may find it more beneficial to have limited status to avoid the highest income tax rates that apply to sole proprietorships.

Dividend payments can be a tax-efficient way to withdraw money from a limited liability company because they are taxed at a much lower rate.

In general, the costs that can be claimed when acting as a sole proprietorship or limited liability company are the same.

However, when running a limited liability company, extra care may be required to avoid expenses being potentially counted as benefits in kind.

One of the main benefits of being restricted is that it protects your personal belongings; you can only lose your investment in the business. Should the company go bankrupt or take legal action, you should not be personally liable for the losses from your finances unless you have provided personal guarantees on loans.

As a sole proprietorship, you and your company are legally equal. You can therefore be held personally liable for any debts and obligations arising from the conduct of your business. This includes taxes, so there is more risk if things go wrong.

Some companies find that being limited gives more credibility with customers. It may also be easier to qualify for credit and accounts with financial service providers such as payment providers.

I have not quoted numbers here because they are easy to find online, and while they may be correct at the time of writing, they could change in the coming budget.

The tax system is complex enough to navigate without constantly changing. It would be helpful if the new government could maintain a period of stability so that companies can plan for the future.

Regular changes to the system add costs, especially for smaller companies.

Small businesses are already at a disadvantage against large companies that can afford teams of internal accountants.

High tax rates affect small and medium-sized businesses much more, as large companies can use complex accounting systems and move profits abroad, which in my view creates an unfair competitive advantage.

I think it’s vital for the new administration to remember that while large companies are more visible and have a louder voice, sole proprietorships and small businesses are the backbone of the economy.

Most of the people working in the UK are sole proprietors or work in small businesses and contribute immensely to society.

Good luck, and let me know how it all goes.