Limited Company vs Self Employed: What do I need to know?
There are many decisions to make when starting a business, but one of the first will be:
Do I operate as a Sole Trader or as a Limited Company?
It’s often not an easy decision to make and it’s important that you take the time to think over each option, examining the advantages and disadvantages of both to make sure you make the right decision for your business.
You may decide that, if you are operating as a one-man band such as a hairdresser or a plumber then the easy to set-up, minimal paperwork, low expense model of Sole Trader works best for you. If you think that you may want to expand at some point, take on staff, and maybe get premises of your own then it’s probably worth considering setting up as a Limited Company.
Whatever your aims and aspirations are for your new business, there is a solution out there, it just takes a little time to work out what’s best for you. Read on!
Sole trader advantages and disadvantages
- The sole trader model is the simplest way to set-up a business and requires very little reporting and paperwork other than filing an annual self-assessment tax return
- It’s easy and simple to change the business structure
- You are in sole charge of your company and the direction it takes
- You can keep any after-tax profits
- As a sole trader there is no distinction between your business and personal assets and so, if your company was to fall into debt, you would be personally liable for that debt
- Raising finance or being accepted for business loans can be difficult as banks tend to favour limited companies
- If your business makes a profit you will probably pay more in tax than a business owner in a Limited Company. An of a Limited Company can draw dividends, which are mostly taxed at a lower rate, this option is not available to a sole trader
Limited Company advantages and disadvantages
- Running your business as a Limited Company may mean that you pay less personal tax on your earnings. If you are a director and a shareholder of your Limited Company, then you can take most of your income through dividends and only a small amount as a direct wage, so keeping your tax liability low. Also, dividends are not subject to National Insurance Contributions, so you can make a saving there too
- Limited companies offer you, as a company director, the added protection of ‘limited liability’, which means if anything was to go wrong with your business you would not be held personally responsible for any financial losses or debts owed by your business
- When you start your business, you will need to register with ‘Companies House’. Once you have done this, your company name will be protected by law and no other business selling a similar service will be able to use that business name
- Lenders are more likely to favour a limited company, so securing funding for a business expansion, may be easier
- Your company will be liable for corporation tax at 19%
- Details about you and your business will be listed as a public record, including your business address, shareholders details and company financial activity
- Running a limited company can bring with additional responsibilities and costs. You will be required to file a yearly return and annual accounts which will take a lot of additional time and manpower. You may need to hire an accountant to manage this for you
- A director of a limited company cannot draw money freely out of the business bank account. You could be paid either through salary, dividends or a combination of the two. However, as you take additional money out of the business you may be liable to pay additional tax
Depending on your current situation, one of these operating models will be better suited to you than the other. Hopefully this guide has helped point you in the right direction.
If you would like help setting up your new business, changing from a sole trader to a limited company or you just have a few more questions that we haven’t answered here, please contact Allison by telephone or send us a message.