The choice you should make when growing into a developed business

Sometimes a Business gets so big that change is needed.

This may help you make the decision on what type of entity you should be.

Capital plays an important role in terms of choosing whether to be a sole trader or a Limited Company.
When a sole trader owes money they will be responsible for paying the debts, “even if this means selling your house” (Bendrey, Hussey, West, 2004, P. 5). This means that you can be made legally bankrupt if you are unable to pay for what you owe. Any profits of the business made are deemed taxable by law of up to 50%. This includes Income tax and National Insurance.


Sole traders can only be self-employed and so cannot earn wages/salaries. Instead, they can take out as much from the capital as they so wish. However when withdrawing cash out of the business, they do not have to pay for tax and may also borrow from the business account because evidently, they are business owners, and so it is their account.


If a business is being sold or assets used within the business are being sold, then the sole trader is taxed by law (Capital Gains Tax).
If you die, you may pass all of the capital to the next generation and all long-term assets may be noted as inheritance tax by the sole trader for the next generation. For computers, you can claim capital allowances which may possibly result in paying less tax. Included in this bundle of advantages, you can also claim deductions for any possible mortgage interest, lighting as well as heating on the condition that you have an office in that specific home.
Reinforced by Charles, Gary, John and Donna (2006, p. 18) each sole trader is a separate business, distinct from the manager. So if for example a private Doctor is a sole trader, then the cash in the Doctor’s business account is a current-asset of the Doctor’s practice.
A Limited Company can be described as an “artificially created legal person” (Eddie, 2003 p. 6). The company has its own separate legal identity because the shareholders’ financial liability is limited to the amount they have agreed to pay for their shares which means that no further capital must be used from the members’ pockets, in which case their houses won’t be on the line. The problem with being a Limited Company is that it is more expensive. However, “it is possible to form a Limited Company for approximately £100” (Essentials of FA). On the other hand, it is much easier to raise larger sums of money in comparison with sole traders. When a Limited Company is formed, some of the financial affairs become public property.


All tax is paid by the company such as corporation tax on profits but shareholders pay higher rates on dividends. Other taxes includes withdrawing money from the company, fringe benefits or other employment benefits and shares given to you at a reduced price. If a decision is made to sell the business or the assets used, received is what is known as a double tax charge, on shareholders. If the owner of a company dies, it continues as a separate legal entity. A Limited Company has no restriction on the size of the owners’ salaries. The company may claim that they need computers/mobile phones for the business and can be provided tax-free. If you work from home, the company’s employees may claim £3 per week for home expenses, which may affect the capital.



Bibliography
Bendrey, M., Hussey, R., West, C. (2004). Essentials of Financial Accounting in Business (6th ed.) Place of Publication: Cornwall.
Horngren, C. T., Sundem, G. L., Elliott, J. A., Philbrick, D. R. (2006). Financial Accounting (9th ed.) Place of Publication: London.
McLaney, E. (2003). Business Finance Theory and Practice. Place of Publication: London.

 

Without going into detail about the content, I'd recommend spacing it out a bit better. As of now it's all mashed together, like a wall of text.