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Sole Trader or Limited Company?

One of the key challenges when making the decision to go freelance is to choose between becoming a limited company or simply setting up as a sole trader. Whilst there are benefits to going limited, many freelancers choose the sole trader option - primarily because they don't want the hassle or the legal commitments which come with a limited company.

We are often asked the question 'Should I form a Limited company?' but the reality is that there is no easy answer. Everyone's situation is different and what's right for one person might not be right for another. As well the obvious issues of tax and national insurance contributions, there are many other factors which might influence your decision for example

  • The type of business you run, or are thinking of running
  • What kind of administrative support you have, if any
  • What your turnover is and how much profit you make
  • Your future plans to grow the business, or not
  • What level of commercial risk you will be exposed to
  • Whether customer perception matters
  • What plans you have, or would like, for pensions and retirement

Lots of things to think about, and most important of all is your own personal preference. You might want the simplicity of being a sole trader rather than a limited company, or you might prefer the security of having ‘limited liability’. In order to make that decision you must have all the information at your fingertips, which is where Easy Accountancy can help.

Advantages and disadvantages

As with all major business decisions, there are pros and cons to each option. Here are some of the key advantages and disadvantages of freelancing as a sole trader, rather than through a limited company:

Sole trader / self employed – a' life more simple' and an easy way to start in business

  • No set up costs
  • No limited company formation fees
  • Lower priced accountancy fees
  • Less government departments to liaise with
  • Just submit a tax return once a year
  • The usual route most people take when just starting out
  • Higher personal risk - you will be personally responsible for the company’s debts, so your personal assets can be at risk
  • Less opportunities for tax planning – for example, if you make £60k this year and only £10k the next, you will still pay the higher rate this year as there is no opportunity to save untaxed money and remove the funds in leaner years. See our limited company illustration for an example of how a limited company gives improved tax planning options.

Limited company - a life 'slightly more complicated', but necessary for some!

  • Some customers, usually PLCs or larger limited companies, will only work with other limited companies which may mean you have to go limited
  • More costly starting up as you will have to pay to form a Limited company
  • You have to file your accounts at Companies House each year, which will be on public record
  • You also have to file accounts, company tax and corporation tax calculations with HM Revenue and Customs every year
  • Accountancy fees are generally more expensive
  • You are separate from the company, so your personal possessions may not be at risk, unlike if you’re self employed
  • You may appear to be a little more professional
  • Better tax planning opportunities - for example if you make £60k this year but only take £40k, you leave the other £20k in the business, thereby keeping under the higher rate tax threshold. If you then only make £10k the year after, you will still be under the higher rate tax threshold as you will have only withdrawn £30k (£10k from this year and the £20k you left the previous year).

If you wish to find out more about freelancing as a sole trader, then you may also be interested in the following pages:

If you are a contractor working through a limited company then visit SJD Accountancy (our sister company) which specialises in providing tax advice and accountancy services for limited company contractors. We also provide a tailored accountancy service for SMEs. For more information on this please call our New Client Services Team on 0500 234 111 or 01442 275 767.

Easy Accountancy

Easy Accountancy is the UK’s only national specialist accountancy firm for freelancers, sole traders and small businesses

If you’ve just started out as a freelancer or run a small business, you’ll definitely need a small accountant and there are plenty of options out there! However, most accountants will charge you every time you get in touch with them; for every phone call, email or meeting.

We don’t want our clients to be scared to contact us and potentially lose out on valuable tax saving advice. It's even more important when you first start out as you really need to set your business up in the best way possible. As a start up you’ll probably have loads of questions and will really appreciate the fact you can call your accountant as many times as you like without the fear of racking up large bills.

Our low cost, all-inclusive fixed-fee accountancy service includes unlimited access to your own accountant throughout the year, so you never need to worry about picking up the phone and then receiving a bill afterwards for the privilege, and covers all your business and personal tax affairs needs. All clients additionally receive: 

  • Help to run your business in the most tax efficient way possible
  • Help so you can understand the taxes you need to pay
  • Advice on the best ways to manage your business
  • Updates and reminders so you'll never miss a deadline
  • Help to ensure you maximise your tax allowances
  • Provide proactive tax advice throughout the year

We’ve saved our clients up to half on their accountancy bills – if you’d like a quote, click on the quote me button to the right of this page. Alternatively, call us on 0500 234111 / 01442 275767 or email heather@easyaccountancy.co.uk.

We also have a money-back service guarantee - all of your telephone calls and emails will be answered on the same day, or we will refund your monthly fee (another first within the accountancy world).

To appoint us as your accountants, please fill in our Client Agreement Form online.

If you are a contractor working through a limited company then visit SJD Accountancy (our sister company) who specialise in providing tax advice and accountancy services for Limited Company contractors. You can also keep up to date by following the SJD Accountancy Twitter

You may also find the following pages helpful:

*If you would like us to complete your company year end accounts we simply ask that you have been a client of Easy Accountancy for one year or have made 12 monthly payments.