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Limited Company or Sole Trader: Which is better for you?

Do you have a vision or a passion that you want to turn into your own business? Thousands of entrepreneurs and individuals look to start their own businesses each year and whilst the attraction of being your own boss, balancing your work and home life along with potentially earning more money is exciting the reality of knowing where to start can be daunting.
There are really two main options when it comes to the legal structure of your new business. The simplest choice is to operate as a sole trader, which is probably why there are an estimated 3.4 million sole traders operating in the UK. The limited company option is also popular, with an estimated 1.9 million operating today in the UK. So, what’s the difference between these two options, and which is better for your contracting business?

Guide to The UK Tax System for Small Limited Companies: Click here to download>>

What is a Sole Trader?

A sole trader is simply a self-employed person who is the sole owner of their business. You and your business are considered the be the same legal and financial entity.  You can set this kind of business up in a few minutes on the GOV.UK website, and there’s relatively little paperwork apart from an annual self-assessment tax return. It’s worth mentioning that a partnership has the same legal structure except with a partnership the business is shared between two or more owners..

What are the advantages of being a sole trader?

  • It is very simple to set up with little paperwork

  • Bookkeeping can be more straightforward and just once a year you will need to add up your income and expenditure to submit to HMRC on your self-assessment. This will change from 2024 when Making Tax Digital applies to all businesses and quarterly reporting will be necessary.

  • You don’t have to file anything at Companies House so you have more privacy as your accounts and personal details are not on a public record.

And the disadvantages? 

  • The main disadvantage is the fact that you and your business are legally considered one and the same. If your business gets into debt, as the owner you are personally liable and may lose personal assets.

  • If you need to raise funds, it may not be as easy as a sole trader as investors and banks favour Limited companies.

  • At a certain level of earnings it is not tax efficient to remain a sole trader and you can take home more money from a Limited company.

What is a Limited Company? 

  • A limited company has its own legal identity, separate from its directors and shareholders. This is still true even if the company is owned and run by just one person. This means your personal finances are protected.  It’s a little more complex to set up, and involves a little more paperwork, but it has a number of important advantages.

What are the advantages of a Limited company?

  • The Limited company is considered a separate legal entity, so you risk less of your personal finances and assets. You only risk what you put into the company

  • You can create a brand. The name you register at Companies House is yours and no one else can use it.

  • Generally speaking Limited companies are more tax efficient as Corporation tax rates are lower than income tax rates.

  • Limited companies can claim a wider range of allowable expenses against profits.

  • In some industries, your clients and customers might be more comfortable dealing with limited companies. It can reassure them that you’re a serious business. In this kind of environment, operating as a sole trader can limit your opportunities and “going Limited” is an obvious choice.

  • You will have greater tax planning opportunities to minimise personal tax. You can expect to take home more money through this route especially if your earnings are high.

  • Future growth may be easier with investment from banks easier to find than if you were self employed

And the disadvantages of a Limited company?

  • There are costs involved in setting up the Limited company and you will have directors’ responsibilities. If your plan is a short-term project between employment roles or is an experiment to see if something works, a Limited company may be an expensive option

  • There is more paperwork involved with statutory returns to Companies House and HMRC but a good accountant will do much of that for you. Admittedly there will be accountancy fees to consider but their good advice should mean these are easily covered in tax savings.

  • You will have to file company accounts on the Public record so privacy is less than as a sole trader. Your company office address and your personal postal address will also be visible. You can talk to your accountant about using their address if you prefer.

  • Sometimes, depending on your industry legislation may prevent running a Limited company from being a good idea. For instance contractors will been to be sure their contracts are outside IR35 to ensure that running a Limited company is the right option.

Getting your structure right from the outset is important. It maybe you want to start small and, in the future, consider incorporating into a Limited company or you may feel the corporate structure from the offset is right for you. Before leaping into anything, why not give our team a call for a free consultation so we can help you start strong and see what else we can do to support your goals.  Our team would love to hear from you on 01296 468185.

If you have any questions or if we can help in any way, please contact our expert team on 01296 468 483 or email info@orangegenie.com.

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