Sole Trader or Limited Company

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If you’re thinking about self-employment, there are a few different options available in how you operate. Two popular options include working through your own limited company or becoming a sole trader. Since the distinction between the two isn’t always clear, we’ve put together a guide outlining the differences.

Should I operate as a sole trader or a limited company director?

If you’re unsure which route to follow, consider some of the following:

  • 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

What is a sole trader?

A sole trader operates as an individual rather than through a business as there is no legal identity to separate the two. As a sole trader, you run your business as an individual and you are considered self-employed.

In order to operate as a sole trader, you must register with HMRC and decide on a name for your business.

All you need to start a Limited Company

Discover all the intricacies of contracting through a limited company with our free downloadable guide.

What’s in the guide?

  • Understanding legislation – what is IR35 and what could it mean for your business?
  • Maximising your expenses – find out what business costs you can expense through your company.
  • Making your business a success – a look at how to manage your time, market yourself and make your business a success.

What is a limited company?

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’.

Will I earn more money as a sole trader or limited company director?

This depends on your profits. If profits are above around £25k per year you may well benefit from working through a limited company. However, if you don’t expect to be earning a lot, working as a sole trader could be more tax efficient.  

Our Take Home Pay Calculator will show you how much you can earn by going limited.

Will it be easier to get a mortgage or a loan as a limited company director?

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. Read our guide to getting a contractor mortgage for more information.

Sole trader or limited company: how much admin is involved?

Sole traders are required to submit an annual tax return to HMRC, to keep sales and expenses records and to pay Income Tax and National Insurance contributions on profits.

For limited company directors, 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. 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.

Do I pay less tax through a limited company or as a sole trader?

As a limited company director, you 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). Profits are usually taken as dividends which do not attract National Insurance, which may help reduce your overall tax liability.

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.

Sole trader or limited company: still can’t decide?

If you’re looking for further guidance about whether you should operate as a limited company director or a sole trader and the differences between the two, we’re on hand to help.

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