Sole trader or limited company?

A limited company gives you room to grow and protects you if something goes wrong. But there’s more admin involved compared to being a sole trader. So if you’d rather keep the paperwork down and you’re not looking to expand, then sole trader might be better.

Deciding whether to become a sole trader or limited company will affect how you get paid, how you pay tax and what you could lose if your business goes bust.

Sole trading – how it works

Despite the name, being a sole trader doesn’t actually mean you have to work on your own forever more. The ‘sole’ refers to the fact that you’re the only one who’s responsible for the business.

The good stuff

• All your money’s your own
  You get to keep all the profits you make (after you’ve paid income tax, of course).
• Less paperwork and easy accounting
  The main advantage of this structure is that there’s less admin than being a limited company. You don’t need to fill in any paperwork to start trading or give any info to Companies House. You’ll just need to register with HMRC for self-assessment and fill in a tax return each year. All in all, this means your accounting should be pretty straightforward.

The not-so-good stuff

• Your liability
  Because the law sees you and your company as the same thing, you’re personally responsible for any debts your business runs up. That means that if your business goes bust and you end up owing money, you’ll have to pay it back from your own pocket.
• It’s harder to expand
  You’ll pay income tax and National Insurance on all the profits your business makes. So more profits = more tax (for example, if you’re bringing in more than £150,000 you could find yourself paying up to 45% of income in tax). If you want to grow your business, the only way you can do it is by re-investing your own money (which you’ve already paid income tax on).

Forming a limited company – how it works

If you start a limited company, legally you and your business are completely separate. As owner of the company, you’ll be a director and shareholder.

The good stuff

• Your personal assets are protected
  Because you and your company are legally separate, if it goes belly up then your personal finances and assets are safe.
• You’ll pay less in personal tax
  You’ll pay corporation tax on your company’s profits. At the moment this is 19% (set to go down to 18% by 2020). You can then take a salary, which you’ll pay income tax and National Insurance on, and top this up with dividend payments from your shares (you’ll have to pay tax on your dividends). You’ll also be able to claim back expenses for things like clothing and equipment, travel and food and drink while you’re traveling, rather than paying for them yourself.
• It’s easier to grow your business
  Because you’ll be paying less personal tax than a sole trader, and you won’t be taking all the profits out of the business, you can put extra income back in to expand it. And because the company is a legal ‘person’ in its own right, it can also build its own credit rating. So if you as an individual don’t have the best credit rating, the company should still be able to borrow money that you can put back into it.
• People like a ‘Ltd’
  Having ‘Ltd’ on the end of your company name can make you look a lot more professional to your customers. Because limited companies are more closely regulated than sole traders (including having their corporate details and accounts published), it shows potential clients that you take yourself and what you do seriously.
• You can protect your business name
  If you’re incorporated at Companies House, your name has to be unique. This can be really useful if you’re looking to build a distinctive brand.

The not-so-good stuff

• Admin
  Setting up a limited company involves a lot of administrative legwork and costs money (although you could save some money and time by getting a formation agent to do it for you). You’ll also have to do lots of record-keeping that sole traders don’t have to, including annual accounts and possibly VAT returns. Not doing these when you’re supposed to could mean you end up with a nasty fine. As the director of a limited company, you’ll also have to register for self-assessment with HMRC.
• Less control over the money you make
  There are strict rules around how you can take money from your business. And you’ll need to share any dividends you pay between your shareholders, which can cut the amount each of you gets.

In a nutshell

Choosing whether to be a limited company or a sole trader comes down to where you see your business going in the future. A limited company gives you room to grow and limits the debts you’re responsible for if something goes wrong. But there’s extra time and money involved compared to being a sole trader. So if you’re happy to keep things small, then you might not want to take the next step.