The number of decisions you have to make as a solopreneur is both daunting and exhilarating. One of the first is around the complex sole trader vs limited company debate.

Weighing up the pros and cons of limited company vs sole trader is something worth spending plenty of time on. The choice you make will impact all manner of things – from how much tax you pay to the legal status of your business.

This article is intended to help you make the right call. While solopreneurs worldwide face similar dilemmas regarding business structure, the information here is specific to those in the UK.

Definitions

Before we begin, let’s define the key difference between a sole trader and a limited company:

  • A sole trader is somebody doing business as an individual, without a formal company structure.
  • A limited company is a separate legal entity, usually owned by shareholders. As a solopreneur, you would likely be the only shareholder, although plenty of people also involve spouses and partners.

1. Setting Up

As a Sole Trader

Setting up as a sole trader in the UK is incredibly easy. All you legally need to do is register for self-assessment tax with HMRC, start trading, and ensure you keep financial records. Then, once per year, you complete a tax return.

Of course there’s a little more to it than that: You’ll need to decide the trading name for your business, and it makes sense to use a separate bank account to keep things organised.

As a Limited Company

Setting up as a limited company is more complicated. You need to prepare several documents to establish the company as a legal entity, and lodge them with Companies House. There are plenty of dedicated websites and services that can help with the process, and many accountancy firms offer this as an add-on too.

While you can “spin up” a limited company in as little as a few hours, it’s important to note that as a director, you are signing up to considerable legal responsibility for your new firm. You have ongoing duties such as submitting annual accounts and confirmation statements.

What to Think About

One of the key advantages of being a sole trader is that it’s easy to get started, with plenty of people able to begin without any external help.

Setting up as a limited company is more involved, and while it’s possible to do everything yourself, many solopreneurs seek assistance from an accountant to ensure they do it all correctly.

Ultimately, deciding on sole trader vs limited company comes down to far more than the ease of setup, so read on to see what else is involved.

2. Legalities and Liabilities

As a Sole Trader

When you’re a sole trader, you and your business are one and the same thing. Most crucially, your money and the company’s money are one and the same, meaning the company’s liabilities (and debts) are yours too.

As a Limited Company

A limited company has a legal identity all of its own. However, it’s a misconception to assume this means you have fewer responsibilities. As a shareholder (possibly the only one), you are still responsible for the business. Furthermore, if you borrow money, you may well be asked to provide a personal guarantee.

What to Think About

The primary reason to choose a limited company over working as a sole trader is to keep things compartmentalised. If you were setting up a company with several other people, this would be a no-brainer. As a solopreneur, the decision isn’t quite so straightforward.

It makes good sense to think about the kind of aspirations you have for your company; Are you building something you might one day want to sell, or starting something you hope will get really big? If so, a limited company probably makes sense, but if your goals are less lofty, starting as a sole trader may prove simpler.

3. Tax and Accounting

As a Sole Trader

Plenty of sole traders with simple businesses do their own self-assessment tax returns and don’t feel the need to involve an accountant. You can choose whether to do your accounting on a “traditional” or “cash” basis (details here).

So long as you keep the records demanded by HMRC, and your financial dealings are relatively uncomplicated, sole trader accounts needn’t feel too demanding, and it’s simple to work out what tax to pay.

As a Limited Company

One of the disadvantages of a limited company is that the accounts are far more complicated. As a separate entity, your company has its own balance sheet and profit and loss, and there’s a clear distinction between your money and the company’s money.

In this scenario, the business also has distinct tax liabilities, primarily in terms of corporation tax on profit. You will still need to do an individual self-assessment as a director, but will also be responsible for submitting accounts (and paying tax) for the company.

What to Think About

Unless you’re trained in accountancy, you’ll need an accountant to prepare your annual accounts and personal tax returns if you operate as a limited company. Realistically, you’ll also need ongoing advice on how to keep records effectively and how to draw money from the business.

There can be tax advantages to choosing the limited company route. However, you will also need to budget both time and money to understand and process your accounts.

4. National Insurance

As a Sole Trader

One of the pros of being a sole trader is that paying National Insurance is quite straightforward. The amounts are relatively simple to calculate, and you generally pay as part of your self-assessment.

As a Limited Company

Once again, National Insurance is trickier as a limited company. You will usually be an employee of your own limited company, and you could find you pay NI both as an employee and as an employer, depending on your level of salary.

What to Think About

On the face of it, National Insurance seems much simpler as a sole trader. However, there can be significant financial benefit to operating your own payroll as a limited company (see more below).

5. Salary

As a Sole Trader

When you’re a sole trader, you don’t really get a fixed salary. Everything will depend on how much money you bring in, and what you have left over after you’ve paid your expenses – both business and personal.

As a Limited Company

Many solopreneurs with a limited company pay themselves a fixed salary, complete with a monthly wage slip and a regular “payday.” Others work with their accountant to devise a system of paying themselves a mixture of salary and dividends.

What to Think About

Although recent governments have chipped away at the tax benefits limited company owners enjoy, some still remain. Ultimately, as a limited company you have plenty of scope around how to structure your renumeration.

If you have a reasonable amount of money coming in, the financial flexibility you gain from working as a limited company may be reason alone to choose that route as a solopreneur. Just remember that you will need good quality accountancy advice to reap the benefits.

6. Expenses

As a Sole Trader

There’s a fair amount you can legitimately claim as a business expense when you work as a sole trader. However, when it comes to things like computers and mobile phones, you are expected to “add back” a proportion of these expenses to account for personal use.

Various deductions are available for working from home as a solopreneur, including contributions toward mortgage interest and council tax.

As a Limited Company

Broadly speaking, you will probably find there are more ways to claim business expenses as a limited company. For example, you are perfectly within your rights to buy company phones and computer equipment. You may also be able to benefit from government incentives aimed specifically at companies.

What to Think About

It’s well worth seeking expert financial advice on business expenses, especially if you’re likely to be paying out for lots of different things. As just one example, there are numerous ways to handle vehicles and mileage payments, some of which are vastly more tax-effective than others.

As a general rule, the longer and more complicated your list of expenses, the more likely you’ll find useful advantages to the limited company route.

7. Privacy and Transparency

As a Sole Trader

One of the advantages of working as a sole trader is that you’re relatively anonymous. So long as you’re not breaching other trademarks and copyrights, you can trade under any banner you wish. Furthermore, your tax affairs are nobody else’s business.

As a Limited Company

If you set up as a limited company, a proportion of what you do becomes a matter of public record. People can freely look at who is responsible for a limited company, and it’s easy to download legal documents and accounts.

What to Think About

The open nature of working as a limited company is a double-edged sword. While it does lay you open to scrutiny, it also means that potential clients and partners can do proper due diligence, and that you can (once successful) easily demonstrate the credentials of your business.

It’s also worth noting that the abbreviated accounts you are required to file with Companies House don’t give an enormous amount away. They are only really an overview of your assets and liabilities.

8. Prestige

As a Sole Trader

There’s nothing to stop you building up a brand and a positive reputation as a sole trader. Plenty of solopreneurs build large businesses and run a considerable amount of money through the sole trader framework. However, in the “business to business” world, it’s undeniable that some companies expect to work with other companies.

As a Limited Company

Superficially, a limited company does give the instant impression of a more serious business. If you’re looking to do business with large firms, they may be reassured by your legal status, where they would otherwise be hesitant to work with a single individual.

What to Think About

How important you find the prestige-factor of limited company vs. sole trader will depend much on your future plans, and the types of companies you plan to do business with.

Missing out on a big contract because a company won’t work with a sole trader may not be a common scenario, but it can happen. As such, it makes sense to carefully consider if this could come up in your line of business.

Conclusion

There’s a huge amount to think about here. Deciding between sole trader and limited company is far from easy.

You might want to consider a quick paid consultation with an accountant to assist you in making the decision. This could prove a very sensible first investment in your solopreneur business!

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