Sole trader or limited company?

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 as 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:

    Benefits of freelancing - the benefits to you and to your potential clients
    Freelancing part time - can you freelance whilst still in your permanent role?
    Sole trader or limited? - which route is right for you?
    VAT and NI - how do VAT and NI affect you as a freelancer?
    Freelancer insurances - what insurances do you need as a freelancer?
    Freelancer take home pay calculator - how much more could you earn by going freelancing?
    Finding freelance work - how to find your freelance roles
    Freelancer FAQs - all your questions answered

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.