Should I Start My Business As A Sole Trader Or Limited Company?Written on May 25, 2016 by Kirk Rice LLP
Taxing Times QuestionsThe Question:
I am planning to start my own business, but I am uncertain as to whether to start as a sole trader or set up a Limited company. There are going to be quite a lot of start up costs and I do not expect to make many sales for the first few years and therefore I will have losses. What should I do?
Kirk Rice LLP answers:
Whilst there are numerous considerations other than tax I will concentrate on the taxation considerations here. A Limited company that sustains losses can ‘carry forward’ those losses and offset them against future profits of the company. This is good news, but should the venture not take off as expected and a decision is made to later close the company then the losses would be lost when the company is closed.
This situation should be contrasted with that of a sole trader. Losses incurred in the first four tax years of trading may be carried back, up to the previous three tax years and set off against general income. From April 2013 the law was changed to cap the amount of income tax relief that an individual can set against their total income, but this is still a valuable relief for a business in its early stages. The limit is the greater of £50,000 or 25% of the individual’s ‘adjusted total income’ for the tax year. For example, if you have been employed for a number of years prior to commencing the business, then losses arising from the business can, within the limits, be used against the employment income which will result in a refund of tax originally paid on the salary. If you were a higher rate tax payer and lets say the loss was £10,000 then this would equate to a £4,000 refund which will be very helpful for a new business.
A limited company does offer the owner ‘limited liability’ and consideration needs to be given to whether that is important to you. The compliance of running a company is more onerous than a sole trader and inevitably costs more in accountant’s fees and so another reason to go the sole trader route in the early years.
Once the business is established and making profits there may then be tax benefits in transferring the business to a Limited company. There is some administrative work in incorporating, at a later date, but it is not too onerous.
Any reader interested in discussing this topic further can telephone Graham Jennings on 01344 875000 or email graham.jennings@kirkrice.co.uk
If you would like to receive Taxing Times electronically, simply email info@kirkrice.co.uk stating Taxing Times Newsletter in the subject heading and we will add you to our distribution list.
Send your taxation and accounting queries to Graham Jennings, Kirk Rice LLP, The Courtyard, High Street, Ascot, Berkshire, SL5 7HP or email graham.jennings@kirkrice.co.uk.
Please note: answers are given for general guidance only and specific advice should be taken before acting on any of the suggestions made.
Recent Posts
-
Career Story – Rebecca EvansWritten on October 9, 2026 by Kirk Rice LLP
-
VAT Compliance: What Every SME Should KnowWritten on October 7, 2026 by Jonathan Swarbrick
-
6 Things to Know About Tax on Extra Income: Second Jobs, Freelance Work, & MoreWritten on October 5, 2026 by Jane Page
-
Business Valuation – Where Do I Start?Written on October 2, 2026 by Kirk Rice LLP
-
Payroll – Should You Outsource?Written on October 1, 2026 by Kirk Rice LLP
