COMPARISON OF LIMITED COMPANY, SOLE TRADER OR PARTNERSHIP AND LIMITED LIABILITY PARTNERSHIP
Limited Company | Sole Trader / Partnerships | Limited Liability Partnerships |
A limited company is a separate legal entity. | No distinction between you and your business. | A limited liability partnership is a separate legal entity. |
A company must be formally incorporated with Memorandum and Articles of Association. There are set up costs. | There are no formation costs, although for partnerships a written partnership agreement is advised. | The LLP must be registered at Companies House. A formal members agreement is also advised. There are set up costs. |
A separate legal entity requires its own bank account, keeping its records separate from your personal affairs. | You do not need to have a separate business bank account (although we would always recommend that you do). | A separate legal entity requires its own bank account, keeping its records separate from your personal affairs. |
Companies are governed by the Companies Act and must; - Keep accounting records; - Filing responsibilities for Annual Return and accounts with Companies House; - Keep Statutory books. | Reduced administration. Sole traders and partnerships are not required to file annual accounts for inspection. You do need to notify HMRC that you have commenced trading within three months of the start of trade. | The LLP Act requires the partnership to; - File accounts with Companies House; - File an Annual Return with Companies House. |
Generally owners and shareholders are protected from the liabilities of the company, subject to personal guarantees being entered into by the owners or shareholders. | Sole traders and partnerships are responsible for liabilities of the business. Your personal assets are at risk if you cannot settle the liabilities of the business. | In theory, the liability of members is limited, but this has not been tested in the courts. |
Shares are transferrable. Ownership may therefore change with trade continuing. | Difficult to dispose of parts of the business. More flexibility with profit share than in a company. | Similar to traditional partnerships, it is difficult to dispose of parts of the business. An LLP has greater flexibility in respect of profit share than a company. |
Some institutions may not be as comfortable in lending to the company the early stages of the business. | Some institutions may be more comfortable lending in the initial stages to individuals, rather than a company. | Some institutions may not be as comfortable in lending to the LLP in the early stages of the business. |
Corporation tax is payable by the company 9 months after the year end for small companies. Tax is payable on directors remuneration via PAYE on 22nd of the following month. After the first £1K, dividends are taxed at 8.75% (basic rate), 33.75% (higher rate) and 39.35% (additional rate) | Tax is paid by instalments on 31 January within the tax year and 31 July following the tax year. There is a final balancing payment due following the tax year on 31 January. | Tax is paid by instalments on 31 January within the tax year and 31 July following the tax year. There is a final balancing payment due following the tax year on 31 January. |
Tax on profits is charged at 19% to £50k and 25% thereafter (with some tapered relief for profits under £250k)
| Profits are taxed at 40% on taxable income exceeding the basic rate threshold and 45% on income exceeding £150,000: https://www.gov.uk/income-tax-rates
| Profits are taxed at 40% on taxable income exceeding the basic rate threshold and 45% on income exceeding £150,000: |
Losses are carried forward to be set off against future profits. Where the company has profits in the previous accounting period, the loss can be carried back twelve months. | Relief for losses generated by a sole trader or a partner can be set against other income in the tax year or carried back to previous years. | Relief for trading losses is restricted to the amount of capital subscribed. |
National insurance. Employers and employees NI is payable on salaries and bonuses: https://www.gov.uk/national-insurance-rates-letters/contribution-rates
| National insurance. A sole trader or partner will pay Class 2 NI and Class 4 dependant on profits: https://www.gov.uk/self-employed-national-insurance-rates
| National insurance. A sole trader or partner will pay Class 2 NI and Class 4 dependant on profits: |