Limited company or sole trader – what should I do?

More and more people are going it alone when it comes to work. Whether it is for family reasons, or you have had enough of long commutes and working for others, setting up your own business is easier and more popular than ever before. There are a few choices that come with that and one of the first you will need to make is whether you should register as a sole trader or a limited company. We take a look at the pros and cons of each to help you make the right choice.

Setting up a limited company

Even if you are one person, setting up a limited company could be the right option for you. A limited company is one that is a separate legal entity and is made up of both shareholders and directors – although you can be both. Limited companies offer:

  • Limited liability as they separate the business entity from the business owner. This way your assets are not at risk should your business run into financial trouble.
  • Greater tax efficiencies above a certain threshold as you are paying corporation tax on your profits rather than income tax. You also have a variety of tax allowances that you can take advantage of as well as deductible amounts against your company’s profits which are more wide ranging than for sole traders.
  • Registering a company name will ensure that no one else can use that, something that is not guaranteed if you trade under a name as a sole trader without registering it.

You will also need to consider the following if you are thinking of setting up a limited company:

  • Your business’s details can be found through Companies House, making the company and directors’ earnings publicly available. If you prefer to keep that information confidential then this is not the right option for you.
  • There are additional responsibilities in the form of legal requirements to file an annual return as well as annual accounts. These will be more time consuming and costly if you are relying on an accountant to manage them for you.

Going sole trader

There is an alternative – that of working as a sole trader. Choosing this option gives you:

  • Greater ease in setting up your new business and there is less paperwork to fill out.
  • More privacy when it comes to your personal and business accounts as they do not have to be filed through Companies House.
  • You pay income tax on your earnings and can take advantage of the income tax bands and free annual personal allowance – at the time of writing this is £12,500.

There are some downsides, including:

  • Operating under an unlimited liability, which means that your personal assets are at risk if the business gets into debt.
  • Paying income rather than corporation tax may be more expensive above a certain threshold. It may be that you decide to start out as a sole trader but move to a limited company should your business expand significantly.
  • If you are looking to grow, getting finance tends to be harder for sole traders than for limited companies.

If you are still unsure and would like more advice or to talk things through, why not get in touch with our team at Hammonds Accountants? We’re here for an informal chat or you can make an appointment to come in and talk to us – find us on 0203 007 4990 or at .