Company

Sole Trader/Partnership
A company must be formally incorporated with a written constitution in the form of a Memorandum and Articles of Incorporation. There is, therefore, an initial setup cost. There are no formation costs, but a written partnership agreement is advised.
Companies are governed by the Companies Acts. A company must:-
– Keep accounting records
– Have the accounts audited*
– File accounts and an Annual Return with the Registrar of Companies. This information is available to the public.
– Keep Statutory Books showing details of shareholders and directors*Your company may qualify for an audit exemption if it has at least 2 of the following:

  • An annual turnover of no more than £10.2 million
  • Assets worth no more than £5.1 million
  • 50 or fewer employees on average
 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 HM Revenue and Customs 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 –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 directorship. The unincorporated business does not carry the same prestige.
Tax is payable on directors’ remuneration paid via PAYE on the 19th of the following month. Tax is paid by shareholders on dividends under the self-assessment rules, although the first £2,000 of dividends are tax free each year.

Unless profits exceed £1,500,000, 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. For an ongoing business the tax for 2020/21 is payable: first payment on account on 31 January 2021, second payment on account on 31 July 2021, with any final balance due on 31 January 2022. For a start-up business, this is slightly different and covered in more detail later in this publication.
First year losses in a company can only be carried forward to set against future profits. Start-up losses generated by a sole trader or a partner in the first four years can be set against other income of the year or carried back to the three previous years, potentially resulting in a tax refund.
The corporation tax rate is now 19% irrespective of the level of profits. The plans to reduce the rate to just 17% have been shelved for the time being. Profits are taxed at 20% on taxable income up to £37,500 for 2020/21 and 40% thereafter with a 45% rate on income over £150,000
There is both employers’ and employees’ national insurance payable on directors’ salaries and bonuses. The NI charge is greater than that paid by a sole trader/partner, but there is no NI charge on dividends. A partner/sole trader will pay Class 2 NI of £3.05 p.w. (2020/21) and Class 4 NI dependent on the level of profits, 9% up to £50,000 and 2% thereafter.