Business start-up: Should you trade as self-employed or via a limited company?
QUESTION: I have always worked as a vet, as an employee for the last 20 years and I’m now considering running my own business.
I have done some research on what this would entail but I’m not sure whether to trade as self-employed or via limited company. Can you outline what I should be considering before going into business?
ANSWER: Moving from the security of a job and a steady wage every month can be daunting, especially given you will now have a number of new responsibilities to consider on top of your veterinary duties.
When you start your own business, whether it be through self-employment or operating a limited company, you will be responsible for paying the correct amount of tax on any income you earn.
There are key differences between tax that is paid by a self-employed individual and tax paid by a company, but the decision you reach should not solely come down to what tax is payable as there may be commercial reasons that could hold more sway.
A self-employed individual who owns a sole-trader business is essentially the “same person”. The individual would have sole responsibility for the business, its debts, employees, customers etc.
If the business gets into difficulty, the individual’s personal assets could be at risk. In contrast, a limited company is a separate legal entity and would be deemed to be a business in its own right.
The owner of the company would be classed as a share-holder and in most cases, for owner managed businesses, would also be a director of the company.
The directors of the company are responsible for the day to day running of the company and decision making.
The company will have sole responsibility for the business, its debts, employees, customers etc. and if the business gets into difficulty, the individual’s personal assets may not be at risk due to “limited liability”.
A limited company is more costly to operate from an administration point of view, as statutory accounts are required which need to be filed at Companies House and it requires its own tax return.
All profits from a sole-trade business would form part of the individual’s sources of income and taxed via an annual self-assessment income tax return.
Sole-traders pay their tax liabilities in lump sums rather than deducted at source before receiving net income.
Therefore it is important that some profits are set aside to cover these liabilities as they become due, typically 31st January and 31st July each year.
Each individual can earn a certain amount of income before they pay tax, this is known as the personal allowance and is currently £12,570.
Any earned income in excess of the personal allowance, is taxed at 20 per cent up to £50,270, 40 per cent from £50,271 to £150,000 and 45 per cent on income over £150,000. In addition to income tax, sole-traders are due to pay National Insurance Contributions.
Class 4 NIC are due as a per cent of profits at two different rates, 9 per cent and 2 per cent, whereas Class 2 NIC is payable at a flat rate of £3.15 per week.
Companies currently pay corporation tax at a rate of 19 per cent (due to rise to 25 per cent) on its total profits.
While this rate is lower than the income tax/national insurance rates for self-employed individuals, it is important to note, that the shareholder/owner of the business would have to extract income from the company, which would be subject to income tax.
Therefore, essentially, the same income could be taxed twice. How shareholders extract funds from the company needs careful planning to ensure it is tax efficient.
If you intend to employ staff, you will need to register and operate PAYE along with the auto enrolment workplace pension duties of an employer.
Registration for VAT should also be considered, either compulsory or voluntarily registration depending on the level of your sales and VAT suffered on purchases.
Other new responsibilities that you may also need to consider before starting your business include:
- suitable premises,
- book-keeping software/services,
- business banking facilities,
- available grant supports,
- health and safety requirements,
- IT/website, and
Starting your own business, as previously noted, can be a daunting task, however, it can also be exciting as you embark on your new venture.
It is important that you engage the services of competent professionals that will partner with you to help grow your business to reach your goals and aspirations.
:: KellyAnne Murtagh (email@example.com) is senior tax manager at PKF-FPM (www.pkffpm. com). The advice in this column is specific to the facts surrounding the question posed. Neither the Irish News nor contributors accept any liability for any direct or indirect loss arising from any reliance placed on replies.