Limited or Sole Trader?

Should I set up a Limited Company?

We get asked this question all the time and there really is no easy answer. Everyone’s situation is different, and what’s right for one person might not be right for another.

There are lots of things which might influence your decision:

  • The type of business you run, or are thinking of running
  • Your future plans to grow the business, or not
  • What level of commercial risk you will be exposed to
  • What kind of administrative support you have, if any
  • How you wish to be perceived by customers

Lots of things to think about, and most important of all is your own personal preference, you might just want to be Limited rather than sole trader. But in order to make that decision, you must have all the information at your fingertips, which is where this guide comes in.

In a nutshell, the four usual options to consider are:

  • Sole Trader - an individual
  • Partnership - two or more individuals or companies
  • Limited Liability Partnership (LLP)
  • Limited Company

What is a Limited Company?

Basically, from a legal point of view, a limited company is totally separate from the person or persons who form it. What that means in real terms is that you and your fellow directors or shareholders have ‘limited liability’. Hence the term ‘Limited Company’.

If you choose to be a sole trader or other non-limited business, your personal assets (house, car, that new iPhone you bought last week!) are potentially at risk if your company fails. But for a limited company, there is an element of protection. As long as your business is operated legally and within the terms of the Companies Act then your personal assets are not at risk.

On paper therefore, the option to ‘go limited’ seems obvious, but before you make that decision, you need to weigh up the pros and cons. Here are some questions which our customers have asked us over the years, along with some answers which we hope you will find useful:

1. Will I earn more money?
If profits are above £25k per year you may well benefit, however even if your profits are lower it’s probably still worth having a chat with an accountant as they be able find ways to make your company more tax efficient.  Our Take Home Pay Calculator will show you how much you can earn by going limited

2. Will it be easier to get a mortgage or a loan?
Some banks do look more favourably on Directors of limited companies, but it really does depend on the bank. Since the advent of self certification it shouldn’t really matter.

3. How complicated is the paperwork, what exactly is involved?
Paperwork should take about 15 minutes per month and involves sending your annual accounts to Companies House by a fixed date each year, completing an Annual Return (a list of directors and shareholders) and submitting a tax return and accounts for Corporation Tax purposes. You will also have to complete a personal tax Return.

The administration isn’t difficult or particularly time consuming but it is easy to miss tax saving opportunities, for example would your business be better on the standard VAT scheme or the Flat Rate Scheme and what’s the most tax efficient way to take money out of your company? This is where it’s useful to have a good accountant they will also make sure you never miss a tax deadline and incur penalties.

4. What rate of tax do I pay? Is it less that the normal rate for an employee or sole trader?
A ‘small’ company will pay company, (corporation), tax at 20% on its profits. How you will be taxed personally is dependent on the level of income that you draw from the company. This income can be structured in a tax efficient manner.

You also have the option to leave ‘reserves’ in the company to help with future growth and development (remember, with a limited company you only pay personal tax on the money you take out of the business). As a sole trader or partnership you will be taxed on the profits of the business as they fall, not on what you have drawn from the business which is not as flexible in terms of future tax planning.

5. How do I decide how much to pay myself and how much to leave in the business?
This is entirely up to you, as long as the business can afford it. You need enough to live on, but there is no point taking out more than you need and being taxed personally on it.

Profits are usually taken as dividends which do not attract National Insurance, which may help reduce your overall tax liability.

6. Are there other benefits I can gain from being a Limited Company?
There are a number of benefits to be gained from setting up a Limited company, the most important of which is the ‘limited liability’ outlined above. However, there are a number of other benefits, such as:

a. Operating as a limited company may offer more ‘Kudos’ and give suppliers and customers more confidence in your business. In fact, it’s often the case that larger companies will even choose not to deal with non-Limited companies.

b. The cost of managing and operating a Limited company is not that much more than with non-limited businesses. From a taxation and accountancy point of view, the changes in legislation over the last few years have meant much lower costs are associated with Limited Companies.

c. You don’t have to start trading within any set time period after you become a limited company. This means that its actually a simple and cost-effective way to protect your business name, as no two limited companies can exist with exactly the same name. Many people form companies in anticipation of the future creation of new businesses, or to protect the name of an existing non-limited business for the future.

d. It is also very simple and straightforward to have more share holders if you decide to grow and offer shares in your business

e. If you decide to sell, it may also be easier to find a buyer for a limited company rather than a sole trader.

7. What happens if I change my mind and decide I don’t want to be a Limited company after all?
All you have to do is complete a form to be removed from the register of companies at Companies House.

8. Do I have to be registered for VAT to be a limited company?
VAT registration is the same for both sole traders and limited companies. You are not obliged to register until you meet the turnover threshold as a company or a sole trader but you may choose to register as they may well be good tax reasons to do so, call us or check with your accountant.

For more information about contracting or freelancing as a sole trader please visit our sister company Easy Accountancy

You may also find our guide on Accounting for Freelancers helpful.

If you have any questions about freelancing or would like any further advice please call SJD Accountancy on Freephone 0500 152500 / 01442 275789 or email jaime.thorpe@sjdaccountancy.com.

SJD Accountancy

SJD Accountancy are the UK's largest specialist provider of fixed fee, Limited company accountancy services to contractors; we've been acting for contractors across the UK since 1992 and have more than 15,000 clients.

We are the only national specialist firm of contractor accountants with offices nationwide. SJD Accountancy has more qualified staff than any other firm in our market with qualifications from the following major tax and accountancy bodies - ATT, AAT, CTA, ACCA, CA, ACA and FCCA.

  • Unlimited face to face meetings. This is a unique service only SJD Accountancy offers - unlimited face to face meetings across the UK - tax is complicated and sometimes only a meeting will do.
  • UK's Largest contractor accountants with more qualified staff. No call centres, no outsourcing, no automated call handling. Simply telephone, email or meet your own dedicated accountant face to face.
  • Money back service guarantee. All your telephone calls and emails will be answered the same day or we will make a full refund of that months fee.
  • Outstanding reputation. We have won more awards for customer service and accountancy excellence than any other firm in our market, including: Best Accountant for Contractors, Accountant of the Year and Best Professional Service Team to name just a few.
  • All inclusive low cost fixed fee accountancy package which includes completion of accounts*, payroll bureau, dividends and corporation tax computations, personal taxation, free bookkeeping software, your own dedicated accountant* and all company returns for a fixed fee starting from £120 plus VAT per month. Check our packages for more detail.

If you have any questions about contracting or would like any further advice please call our new client services helpdesk on 01442 275789 or email: janice@sjdaccountancy.com. Our new client services helpdesk is open Monday to Friday (8am to 6pm).

Appoint SJD Accountancy and never worry about your tax or accountancy affairs again.

Form your own Limited company with SJD - our same day online company formation service includes company bank account set up, VAT/PAYE registration and advice on optimum share structure. 

You may also find the following pages, guides and case studies useful:

*If you would like us to complete your company year end accounts we simply ask that you have been a client of SJD for one year or have made 12 monthly payments. All accountants are part or fully qualified.