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Is it Better to Be Self-Employed or a Limited Company?
When you’re setting up your own business, you have an immediate choice to make in how you organise it. Whether you’re putting your skills to use as a contractor or starting up something you expect to grow and put new employees on payroll, you’re going to be dealing with income and tax in a completely different way than you will have done while on someone else’s staff.
Your first choice will be whether to position yourself as self-employed or to set up a limited company.
Why Become a Limited Company?
Many contractors work as self-employed individuals their whole careers. For others, it’s often seen as a natural progression to go from sole trader to limited company.
The primary difference between the two is a legal one. If your business is a limited company, your own liability is limited; as a sole trader, you and your business are legally the same. However, as a sole trader you pay income tax on your business profits rather than corporation tax, and the paperwork required of you is (in almost all cases) simpler and more straightforward.
The single biggest attraction of a limited company is probably the limited liability, but there are others.
Limited Liability
The worst that can happen to your personal situation should your limited company fail (which obviously we all hope it does not) is that you lose what you had invested in the business. This can include any company vehicle and other assets associated with the business, as well as the monetary value of your investment. However, your house, any personal vehicle, and any other investments and savings you have are safe.
Capacity to Scale
Issuing shares in your limited company gives you a way to rase capital not available to a sole trader. This can make it faster, smoother, and easier to scale your business as you progress.
Business Continuity & Legacy
While few business founders are thinking about the future beyond their involvement with the company when they get started, a business established as a limited company has an easier time lasting beyond the founder’s retirement. As a limited company it’s much easier to prepare for the future.
Tax Efficiency
We mentioned earlier that a sole trader pays income tax rather than corporation tax. Typically this is actually a better deal for the business, allowing more profit to be retained for use. As a company director you can also draw some of your income as dividends, which can mean less tax for you personally.
Why Stay a Sole Trader?
The two biggest arguments in favour of being a sole trader both revolve around how simple the system is.
As a sole trader, you will always have the final say over all business decisions, from where to source your business’ accountancy services to where to have your Christmas party. While you may delegate these decisions to others, ultimately the power – as well as the responsibility – all stops with you.
With a limited company, your decisions will always be beholden to shareholders, as well as to the market you’re in. You may add new directors, who will also have a say,
The administration of a sole trader is also simpler. Your accounts and reporting are handled more straightforwardly and much less information about your company will be public.
It’s also true of a sole trader that the same level of legal responsibility to your business doesn’t exist. Should you decide to make it a secondary priority behind something else, that’s also entirely your decision.
Choosing Between Sole Trader and Limited Company
Before you maker the decision, it can be worth asking yourself whether you need to choose yet. By default you will begin as a sole trader.
While your investment and business assets are relatively minor, the personal liability you face may not seem so severe. If you don’t feel the need to expand quickly, you don’t need to raise capital through sale of shares or other investment opportunities (which may also prefer a limited company). And to begin with you may want to retain all profit personally.
So you may not need to make a decision yet. Once you do, provided that you have the documentation ready, becoming a limited company can be a relatively swift process.
You will need to:
- Register for corporation tax with HMRC
- Provide details and submit your documentation to Companies House
- Set up a separate business bank account
- Transfer business assets to your limited company
- Inform clients, suppliers, and other stakeholders of your change in status
- Choose a unique name for your business if you haven’t already
This list can be executed relatively quickly, but ‘submit your documentation’ is the kind of simple statement that hides a lot of complexity! That’s why we offer a dedicated company formation service, helping local businesses in the Lancaster and Morecambe area to make the jump.
If you want to talk about the specifics for your circumstances and see how business accountancy can support you, why not get in touch?
Professional Accounting And Financial Advice
Contact TRW Accountants
Address:
TRW Accountants
95 King Street
Lancaster, LA1 1RH
Contact Details:
Tel: 01524 64187
Fax: 01524 60029
Email: office@tr-w.co.uk
Registered in England and Wales. Registered office – as above. Company registration 03851905
