The majority of Network Marketers choose to operate as a sole trader when they first start out – and there are a couple of good reasons for this:
- It’s easy to get set up and registered with HMRC
- It gives you flexibility to utilise losses against other income
We’ve previously written an overview of the four different business structures available in the UK which you can read here.
So why might you wish to consider changing from sole trader to limited company?
Take home pay
The main reason why sole traders decide to switch to a Limited Company is that it may leave them in a financially better position when it comes to their take-home pay. This is down to the different tax levels although under the current tax regime, the tax burden of a sole trader compared to a Limited Company is not a great deal more.
As a sole trader, you pay at least 20% of your income on tax, in addition to Class 2 and 4 National Insurance Contributions.
As a Limited Company, you usually pay yourself a small salary, so the personal tax liability is minimised, with the majority of income coming from dividend payments – which have a lower tax rate of 7.5%. The tax-free dividend allowance for shareholders is £2,000 for this tax year.
Being paid via dividends also means that your National Insurance Contributions (NIC) are lower.
Liability
Operating as a Limited Company also brings advantages regarding your personal liability. As you are only personally liable for the nominal value of shares that you own in the company, you’re better protected from any debts the company may incur in case of insolvency.
Professional perception
Rightly or wrongly, being the Director of a Limited Company may result in a more favourable perception of your business, with others seeing you as more professional or more credible.
As part of your incorporation with Companies House your company name will become protected and therefore keep others from using it.
Expenses
As the Director of a Limited Company, you can claim for a wider range of expenses which can help you improve your tax efficiency.
Transfer of ownership
If you ever decided to sell your business, this is easier to do for a Limited Company than it is if you were a sole trader.
A look ahead
With effect from 1 April 2023 corporation tax rates are going up if company profits are over £50,000 per annum so this will make Limited Companies less advantageous for those making higher profits.
If you’re considering changing from a sole trader to a Limited Company, we would be delighted to assist – although the process is actually straightforward.
Get in touch with our team on 01444 458252 or info@prbmp.com.