From flexible holidays to a sense of independence, there are plenty of benefits associated with freelancing and self-employment. You’ll also get to decide whether you want to operate as a sole trader or a limited company. This is an important decision as the structure of your business can have a big impact on your bottom line.
Want to know more about sole traders versus limited companies? Read on for our guide to the core differences between each structure, as well as the pros and cons.
Limited companies
Setting up a limited company means you’ll be operating a separate legal entity that underpins your business. Size isn’t an issue, with limited companies often fronted by just one entrepreneur. You’ll be a named director and will be responsible for all financial and legal decisions made on behalf of your company. It’s also important to file annual returns and comply with regulations enforced by statutory bodies such as HMRC and Companies House.
Your own personal finances are kept entirely separate from the assets and liabilities of your limited company. Instead, you’ll pay yourself a salary or dividends sourced from company profits. As your business grows, operating as a limited company protects your personal assets and safeguards you against any financial difficulties your company may face.
From a tax efficiency perspective, limited companies pay Corporation Tax instead of Income Tax which can often be more profitable. You’re also eligible to redeem corporate allowances and tax-deductible costs. The benefits of operating as a limited company mean around 1.9 million Brits currently choose this business structure.
Sole traders
As a sole trader, you’re categorised as self-employed and run your own business as an independent entity. After paying taxes you’re entitled to keep all profits made from your business activities and are personally responsible for any gains or losses. The structure is simple, with minimal paperwork and relatively straightforward annual self-assessment tax returns.
All you need to do to set up as a sole trader is register via the Gov.uk website. Sole traders also enjoy more privacy than limited companies and incorporated businesses, who are required to list details via Companies House.
When it comes to downsides, sole traders are not considered separate entities under UK law which means you have unlimited liability. So, if your business slips into debt you’re personally responsible and could lose personal assets. Raising cash can also be difficult as banks and investors are reluctant to finance sole traders and tend to favour limited companies and established businesses. This can hinder your expansion opportunities and force you to remain a small, independent business.
Tax rates can also be an issue, with sole traders often hit with higher levies once they hit a certain earnings threshold. As a result, once you start climbing the income ladder it could be worth setting up a limited company to maximise your profits. Despite tax pitfalls, there’s plenty to love about the sole trader structure, which is why an estimated 3.4 million Brits operate under this model.
The verdict
Ultimately, deciding to conduct business as a sole trader or a limited company will depend on the unique structure of your business and its exclusive needs. Talking to a professional accountancy firm to discuss your options and weigh up the pros and cons is one of the best ways to find a match. At UWM Accountants, we offer professional business planning services for individuals and companies across the UK. In short, our team of Leeds-based accountants can help you succeed with the best strategy for your business going forward.
