Limited Company

Sole Trader/Partnership

Companies are governed by the companies Acts. A company must:

Sole traders and partnerships are not required by law to have annual accounts nor to file accounts for inspection. However, annual accounts are necessary for the Inland Revenue tax returns.

Companies may have greater borrowing potential. They can use current assets as security by creating a floating charge.

Sole traders and partners are unrestricted in the amount and purpose of borrowings but cannot create floating charges.

Shares in a company are generally transferable – therefore ownership may change but the business continues.

Incorporation does not guarantee reliability or respectability but gives the impression of a soundly based organisation. Personally, there may be prestige attached to a directorship.

The unincorporated business does not carry the same prestige.

Tax is payable on director’s remuneration paid via PAYE on the 19th of the following month. If applicable, higher rate tax is paid by shareholders on dividends under the self-assessment rules. Corporation tax is payable 9 months after the year-end.

For a sole trader or partnership, tax is generally paid by instalments on the 31 January in the tax year and the 31 July following the tax year. Tax for 2009/10 is payable:- first payment on account on 31 January 2010, second payment on account on 31 July 2010, with any final balance due on 31 January 2011.

Losses in a company can only be carried forward to set against future profits.

Losses generated by a sole trader or a partner can be set against other income of the year or carried back to prior years.

For profits up to £300,000 tax is charged at 21% (2010/11).

Profits are taxed at 40% on taxable income in excess of £37,000 and at 50% over £150,000 (2010/11).

There is both employer’s and employees’ national insurance payable on directors salaries and bonuses. The NI charge is greater than that paid by a sole trader/partner.

A partner/sole trader will pay Class 2 NI of £2.40p.w. and Class 4 NI dependent on the level of profits.