Ben Sztejka ACA is the founder of Your Ecommerce Accountant – a specialist accountants for online businesses. As a former online seller on eBay and Amazon, when Ben trained as a Chartered Accountant he found that traditional accountants did not understand ecommerce clients. In 2018 Ben founded Your Ecommerce Accountant with the aim of providing a knowledgeable service for online entrepreneurs.
Today, Ben discusses whether you should set your business up as a sole trader or as a Limited company with the pros and cons of both options:
Sole Trader or Limited Company: What do Online Marketplace Sellers Need to Know?
If you’re selling through an online marketplace such as Amazon or eBay there are two ways you can set up your business.
You can operate either as a sole trader or a limited company. But how do you decide which business model will suit you best?
When to Decide
In certain business circumstances, you might launch your enterprise as a sole trader and then later on, as your business grows, decide to become a limited company.
But with online marketplaces, it’s much better to make this decision right at the start.
The reason for this is that when you register your marketplace account to start selling, you will need to indicate whether you want to do this as a sole trader or a limited company.
And once you’ve made this decision, it is very difficult to change the type of account you hold. For Amazon sellers, changing from a sole trader to a limited company means your account will be suspended for a number of weeks whilst they reconfirm your account – potentially leading to a month of lost revenue in some cases.
Therefore, it’s far better to look at these options BEFORE you set up as an online trader. Then you can make an informed decision.
What’s the Difference Between a Sole Trader and a Limited Company?
As a sole trader, you’re a self-employed person and the sole owner of your business.
In a limited company, your business has its own legal identity, separate from the person owning it. This still applies if the only owner is you.
Each of these different business types comes with pros and cons.
Sole Trader Pros and Cons
- Your business structure as a sole trader is straightforward and therefore easy to set up. There’s less paperwork, as you don’t have to register with Companies House.
- It’s very private too. Unlike a limited company, your details aren’t automatically public knowledge. Basically, you only need to let people know the information they need to encourage them to do business with you.
- You can submit your accounts via self-assessment which can be done by yourself or at a low cost by an accountant.
- The sole trader is wholly responsible if their business goes into debt. This kind of personal liability can mean you end up losing personal assets if things go badly wrong.
- You can’t claim the sort of tax reliefs that limited companies can because they pay corporation tax. Generally, you pay more tax as a sole trader than a limited company.
- For marketplace sellers, changing from a sole trader to a limited company is very difficult and usually leads to your seller account being suspended for a number of weeks before it can be switched over. This often means sole traders regret their initial choice to go for the ‘easy’ option when starting out.
Limited Company Pros and Cons
- A limited company has limited liability, which generally means your personal assets aren’t at risk if your business runs into financial difficulties.
- You pay corporation tax rather than personal income tax on your earnings. You have a fair degree of flexibility in how you pay yourself too, providing plenty of tax planning opportunities. There are more tax-deductible items you can take advantage of.
- You’ve also got protection for your trading name once you’ve registered it at Companies House. If you’re a sole trader, on the other hand, you can’t legally prevent someone from using the same trading name as you.
- Running a limited company is more demanding in terms of paperwork and financial administration. There are more reporting requirements, including filing annual company accounts and a confirmation statement with Companies House.
- Generally, a DIY approach to your accounts will not be sufficient if you’re a limited company so you will need professional accounting support. This can be costly depending on the accountant you choose.
Who Pays the Most Tax, a Sole Trader or Limited Company?
Tax is the key issue for most online sellers when choosing between becoming a sole trader or a limited company on an online marketplace.
In fact, while limited companies are more complex business structures, the tax situation is simpler. You pay 19% corporation tax on your profits, and your first £2,000 in dividends is tax-free.
For sole traders, the amount of tax you pay will be down to how much you earn. Currently, the personal allowance in the UK is £12,500, so you pay nothing below this. The 20% basic rate applies to earnings between £12,501 and £50,000.
If you earn above £50,000 you’ll be subject to the higher rate of tax at 40%.
If you’re fortunate enough to earn over £150,000 then different rates apply.
What About VAT?
VAT is a separate issue. You can register for VAT whether you’re a sole trader or a limited company. However, this is only compulsory if your sales are above the £85,000 threshold.
There is plenty to know about VAT when selling into the EU as well, but there are no significant differences whether you are a sole trader or limited company.
Prior to July 2021, online sellers into the EU didn’t need to worry about paying VAT if their total transaction values fell below each EU country’s total sales limit, known as ‘distance selling thresholds’. However, now both sole traders and limited companies selling on marketplaces are required to sign up for the EU’s Import-One-Stop-Shop (IOSS) portal regardless of the total value of their sales into the bloc.
So, Which is For You?
The main deciding factor when choosing between being a sole trader or limited company, will be what you expect to earn.
It’s quick and simple to start off as a sole trader, but you must consider what your total earnings are likely to be including any other income you have coming in.
If, for example, you have a regular salary that’s already close to the £50K threshold, then anything you earn online will be taxed at 40%. In this situation, registering as a limited company from the start should save you money on taxes.
Also, consider the scale of your ambitions. If you plan to expand your marketplace business then it can make sense to put a limited structure in place to support this, but if you want to just earn a few pounds on the side, setting up as a sole trader is probably the best option.
However, the issues many marketplace sellers’ face when switching their profiles from a sole trader to a limited company means many regret starting out as a sole trader due to the potential for loss of earnings, so – if you plan on running a scalable business – a limited company is undoubtedly the best way to start.