Limited company, sole trader or partnership?
Historically limited companies were always used where there was a choice to save on Tax. Dividends were used to extract money. This compared with the sole trader or a partnership saved the class for national insurance cost which is about 9%
With the advent of Tax on the basic rate of dividends, it’s now about the same tax wise.
When to use a limited company :
If you are able to leave the money in the limited company, i.e. you do not need it for living expenses then it will generally be cheaper to use a limited company as opposed to being a sole trader. This advice applies if you are a higher rate taxpayer. If you’re a basic rate tax payer generally my advice would be to trade as an independent so trader . After all your accountancy costs are always more if you are limited company
Secondly, use a limited company if you are a contractor and your client insists that you use one. You will not be able to use this old trader in these circumstances however much you argue (however be careful of IR 35)
Thirdly, you could use the original intention of a limited company to get limited liability. So for example, if you are in construction and pricing jobs that carries an element of risk, I would always recommend the limited company option.
If you do have a large business, the obvious trading vehicle is a limited company. If the intention is to sell a business generally being a limited company is what you want to have. Additionally, having the option of shares makes it really easy for different people to take equity ownership.
When to use a partnership:
This is not definitive, but if you’re a small businessman with a nonworking spouse who helps with your administration, I would always advocate using a partnership. It is flexible can use his or her personal allowances in full and avoid the need to set up a payroll scheme if you’re trading as a sole trader
Secondly, consider a limited liability partnership (LLP) this is very similar to a partnership. It is just a little bit more formal. You get all the tax benefits of a partnership but you do receive limited liability so this is actually possible for say somebody in construction taking on larger contracts who doesn’t want the hassle of a limited company.
Thirdly, I use LLP’s as family investment products to hold property in cash to pass down Tax efficiently to the next generation. This is an excellent way of inheritance tax reduction. It’s complicated but for the wealthier client I would recommend it wholeheartedly.
When to use a sole trader Business :
This is for the small businessman, perhaps with a working spouse. Accountancy costs are the cheapest your information is totally private and not published at company’s house and it is very easy to draw money out of the company without breaking any rules.