Limited company or sole trader: Which is best for you?

One of the first decisions you’ll have to take before starting your new enterprise is what business structure to adopt. Go down the sole trader route and you’ll be taking the simplest – and most popular – option out there: you own your business. Incorporate as a limited company and, even if you’re the sole director/shareholder, your business is legally separate from you.

There’s no hard and fast answer to this: the simplest rule of thumb is to go with what works best for your individual circumstances (and we don’t want to sound like party-poopers, but always seek professional advice before making a big business decision like this).

There are some general pros and cons to incorporating as a limited company or striking out as a sole trader, so we’ve listed them below to help you to make an informed decision.

 

  1. Do you want your personal assets to be protected or not?

A limited company means just that: your personal liability is limited. Since the company is a distinct legal entity, your personal assets are protected if the business incurs losses. In other words, your house/car/savings/luxury yacht/island in the Caribbean cannot be seized if things go pear-shaped.

A sole trader, by contrast, incurs greater personal risk. Put simply, what your business owes, you owe. Any or all of your assets could be used to pay off your creditors, which is a bit of a scary thought.

 

  1. Does your company name need to be protected?

As a limited company, your company name will be protected by law and no other limited company can operate with a name identical, or too similar, to yours. That said, this cuts both ways: you might find that the name you have set your heart on has already been taken and you are left trying to conjure up a new name and brand identity.

 

  1. Is professional image important in your industry?

Of course, it’s true that you can maintain an entirely professional image and status as a sole trader. However, it’s also true that operating as a limited company tends to convey a higher degree of professionalism than self-employment – and in some industries, corporate image is everything. Being a limited company carries a degree of credibility and trust – and that can have additional benefits, such as a wider client base, access to overseas markets and a stronger brand identity.

 

  1. Have you got your head around IR35?

If you’re a freelancer or contractor operating under a limited company, you need to be aware of HMRC’s IR35 legislation, which could have serious implications for your bank balance. In a nutshell, HMRC is keen to clamp down on ‘permtractors’ or ‘disguised employees’ who get tax breaks from working through their own company but who should be taxed as permanent employees of their client. If there’s any danger that you could be caught out by IR35 if you incorporate as a limited company then speak to us or seek professional advice.

 

  1. Are you prepared for paperwork?

To set yourself up as a sole trader, you simply need to notify HMRC and register for self-assessment. Your tax will be calculated for you when you do your tax return. It’s simple and (relatively) easy to manage.

If you decide to go down the limited company route, you’ll need to register with Companies House and formally incorporate (which basically means that your company legally exists). That said, there are websites out there, such as ltd-companies.co.uk, that will do all the legwork for you. There are also more legal and statutory obligations, such as filing an annual return and posting annual accounts to Companies House, which leads us to…

 

  1. How much do you want to pay for accountancy/bookkeeping?

Because there’s more to do to keep Companies House and HMRC happy when you’re a limited company, accountancy and bookkeeping costs tend to be higher.

 

  1. Can you save yourself money by going limited?

Individual taxpayer rates are set at 20-45% on income (depending upon earnings’ threshold) and, as a sole trader, you’ll also have to pay National Insurance contributions (NICs). Corporation tax – which only limited companies pay – is a measly 19% by contrast in the 2017/18 tax year – and the Treasury wants to reduce it even more. Greater tax efficiency tends to mean higher profitability.

Directors of limited companies can also be cannier in the way that they pay themselves: drawing a small salary and high dividends (if all that sounds like gobbledegook, talk to your accountant!) leads to more take home pay and a lower tax bill.

 

  1. How do you feel about your business details being in the public domain?

If you value your privacy, being the director of a limited company may not be for you. Limited companies have to share certain business details on a public register, including directors’ names, the company’s registered address and its annual accounts. As a sole trader, your accounts remain your business.