Whether you have already been living the self-employed life or are just looking to step out of your current job, the question of whether to act as a limited company or sole trader outlines which direction you want your work to take.
There are advantages and disadvantages to both approaches, so you have to decide which side outweighs the other moving forward.
What are Sole Traders and Limited Companies?
Sole traders are, fundamentally, self-employed persons who are the sole owners of their own business. For all intents and purposes, the sole-trader “is” the business.
A limited company, on the other hand, is a formal business structure with its own legal identity. It can still be run by just the owner but is a distinctly separate entity from them.
What are the advantages and disadvantages of being a Sole Trader?
Sole traders are afforded a much easier set up process than limited companies, along with relatively little paperwork. They also have more privacy than limited companies as they do not have to post their details to Companies House.
On top of this, sole traders can offset losses against other income in the same tax year, carry them back to previous tax years, or carry them forward against future profits. A limited company can only carry them forwards.
However, a sole trader has unlimited liability, meaning that he/she is personally liable for business debts.
What are the advantages and disadvantages of limited companies?
Unlike sole traders who have relatively little paperwork, directors of limited companies have “fiduciary responsibilities”, outlining documents the director is legally obliged to complete. This paperwork can be more costly to produce, as well as time consuming, which along with the incorporation fee makes it harder to set up.
On top of this, you need to formally record a salary, dividend or loan if you want to withdraw money from the business.
However, limited companies have the benefit of being “limited liability”. That is to say that the owner does not risk their personal assets – only those which they have invested into the company. Limited companies are also generally more tax efficient to operate due to the requirement to pay Corporation Tax as opposed to income tax.
In some sectors, contractors or agencies will refuse to even work with sole traders due to the legal protections that a limited company provides, as well as the more credible impression that being a limited company presents.
Deciding whether to set up as a sole trader or limited company can be a hard decision to make, and one which we would recommend you speak to an accountant about.
As a preliminary step however, you should consider the type of clients you will be targeting, as well as the environments that you will likely be working in.
If you are likely to have clients who only engage with limited companies, you should comply with this guidance. Likewise, if you are going to be working in a high-risk, high-sensitivity environment, the protections from personal liability that a limited company offers would be advisable.
If you do choose to go the sole-trader-route, shop around carefully for small business insurance policies to avoid being sued personally.
For help with any of your accounting or business advisory needs please contact Stack & Jones Accountants on 01869 277973 for a free 1-hour consultation.
Sources: , , , theguardian.com
Image source: Unsplash.com