It’s the freelancer’s perennial quandary – should I stay as a sole trader, or form my own Limited Company? There are advantages of both, but also some drawbacks to be aware of. Remember every situation is different – some people may choose to go Limited for the added weight it puts behind their company name, some people may choose not to incorporate to as they don’t earn enough to take advantage of the added tax efficiency. The choice is entirely yours. So – should you go Limited?
Advantages of going Limited
This basically means if you company goes bust, your personal belongings can’t be touched. Your maximum losses can only be up to what you put into the company in the first place – meaning you only stand to lose what you invested. Limited Liability can become invalid if you act illegally though – so don’t do anything naughty!
Many clients – especially big corporates – will be more inclined to do business with Limited Companies. For them it means your payment is purely a business transaction and they avoid the muddy waters of PAYE and National Insurance Contributions. In fact, many large companies (usually financial institutions) refuse to do business with Sole Traders.
Potential for greater profitability
As a Sole Trader, you’ll be taxed on your income. This means you’ll end up paying Income Tax and National Insurance Contributions on everything you earn. Once you get into the higher echelons of earning you could be seeing a significant chunk of your take-home pay being whisked away by the tax man. By operating through a Limited Company you will pay Corporation Tax of 20% (assuming your profits are less than £300,000), and can pay yourself through a combination of low wage (to minimise your PAYE and NIC outgoings) and dividends. This will result in less of your money going to HMRC, meaning more of it in your pocket.
You can claim business expenses through your Limited Company, such as equipment and mileage allowances. Sole Traders can also claim business expenses, although obviously they wouldn’t go through a Limited Company.
As a sole trader you are reliant on your own personal credit rating to borrow capital – however a Limited Company can establish their own credit rating against which to borrow money.
You can also issue shares in your company as a method of raising funds – essentially selling part of your business at an agreed price.
As a Limited Company is its own legal entity, should you wish to hang up your hat, you can sell your entire business – clients, equipment and all. This can be a difficult task for a sole trader as typically the equipment used is owned by them personally, and many elements of the business will be tied to their specific identity.
Advantages of staying Sole Trader
No IR35 worries
The elephant in the self-employment room, IR35, only applies to people operating under a Limited Company, therefore you can avoid that mess entirely by simply not going Limited.
Both Sole Traders and Directors of Limited Companies are required by HMRC to submit a personal self-assessment, but those operating a Limited Company must also submit extra paperwork for their company (Annual accounts, Corporation Tax Return, VAT Returns if applicable etc.). As a sole trader you will avoid most of this – although you may find your accountant will take care of this for you should you decide to go Limited.
As a sole trader you must submit a personal self-assessment tax return, however the accounting process for sole traders is much simpler than for Limited Companies, so accountancy costs can be cheaper.
Limited Companies must make certain information public, such as names of Directors and shareholders. These are available from Companies House to anybody upon request. As a sole trader you do not have to provide such information.
Want to form a Limited company?
We’ve teamed up with GoLimited.co so you can be up and running with very own Limited Company in as little as ten minutes, you’ll only pay cost price and there’s no hidden upsell!
For more information on operating a limited company, check out Company Bug
Photo by Neo_II