If you’re just starting out in business, you’ll need to make a pretty important decision early on: whether to register your new venture as a sole trader or as a limited company.
The structure you settle on will have a huge bearing on the type of work you take on, how you draw your earnings, how you work with others, and how you’ll be able to grow your organisation over time.
Here are a few things to bear in mind when reviewing your options. Remember, you can always speak to me for advice that’s tailored to your current circumstances.
The benefits (and drawbacks) of becoming a sole trader
If you’re keen to pave your own way and you’re comfortable being the only stakeholder in your company, then life as a sole trader might be for you.
There’s no need to register with Companies House when you take this route, but you will need to notify HMRC that you are now self-employed (there’s no fee for this, and you simply complete a form online). Accounting is much more straightforward, but you will need to make sure you complete and submit your self-assessment tax return every year to avoid penalties!
Pros:
- It’s easy and cheap to set up as a sole trader.
- You have full control over all business decisions.
- There’s MUCH less paperwork – all you need to do is keep an accurate record of your income and expenses.
- You can enjoy a simpler tax structure – you’ll pay income tax on your business profits through the self-assessment system, and you’ll need to pay certain National Insurance contributions.
- Your expenses can be tax-deductible – every little helps to keep your tax bill down!
- All the profits belong to the sole trader.
- You can still employ staff – so you’re not limiting your own expansion.
Cons:
- As a sole trader, you and your business are one and the same – so you’ll personally take on any debts incurred and could place your own assets at risk.
- Working as a sole trader could be less tax efficient overall – this is where the perks of registering a limited company might be more appealing.
- All profits are taxed as income – so you’ll likely fall into the higher rate tax band much faster.
- Sole trader’s don’t have access to certain benefits like pensions and sick pay.
- It’s trickier to get external funding.
Becoming a sole trader is perfect for:
Self-sufficient people with specific skills! Freelancers of all professions often choose to become sole traders, including creatives (such as photographers and copywriters) and tradespeople (your local plumbers, electricians, plasterers, etc). A sole trader business often benefits from a personal touch, fostering closer relationships with clients and customers.
Is it worth setting up as a limited company instead?
Sure, there’s more red tape and legislation involved in creating a limited company, so it’s not for everyone. But if you have a low appetite for risk, are keen to grow quickly and/or want to bring multiple people into the fold, this could be the better option for you.
Pros:
- It’s ideal if there are two or more directors/stakeholders involved – everyone’s roles, responsibilities and investments can be immortalised in writing, so there’s no confusion further down the line.
- You’ll pay less tax on your profits – so there could be savings to be made here.
- You can take your earnings as a mixture of PAYE and dividends – again, this is a much more tax efficient way of doing things for many.
- You will be an entirely separate entity to your business – so your own money and assets won’t be at stake if you run into financial trouble, and no legal action can be brought against you as an individual, only the limited company itself.
- Larger companies will be more inclined to work with you – they like to know you have a more secure setup than a freelancer or sole trader.
- You can take out a Director’s Loan – ideal if you need more flexibility when it comes to what, and when, you draw cash from the business.
- You can set up a limited company with just a single employee (you) – so you can enjoy all the benefits without having to bring in more staff.
Cons:
- It’s more expensive to set up as a limited company – you’ll need to choose a name, register with Companies House, provide details of your directors and shareholders, and send off all the necessary forms (and there’s a charge for all the above)
- There are many more administrative responsibilities to consider – and some of these will come with fees!
- For example, as well as taking care of your own self-assessment, you’ll need to submit a corporation tax return every year – and you’ll need support from an accountant in order to do this. There is a the potential for being taxed twice.
- All your financial accounts and director details are public record which can reduce privacy.
- You’ll also have to pay PAYE (income tax) and National Insurance contributions for all staff to HMRC, every quarter.
- You must attend annual directors’ meetings.
Registering a limited company is ideal if you:
Want to give your company its own legal identity and keep its assets separate from your own. It’s also a more suitable option if there are to be multiple directors/shareholders involved in the business.
If a few of you want to join forces, you could register as a limited liability partnership (LLP) instead. However, your arrangements won’t be formalised in the same way, and all partners will be liable to take on any debts that are accrued; with a limited company, this won’t be the case.
Hopefully, you’ve now got a more in-depth understanding of the advantages and disadvantages of registering as a sole trader vs a limited company.
