Sole Trader or Limited – Which route is right for you?

Find out the advantages and disadvantages of both options

It’s a question that we get asked regularly, should I go sole trader or limited? Well as with anything, there are advantages and disadvantages to both options.

In the following paragraphs, we will look at the advantages and disadvantages of both structures to give you a clearer picture as to which route would be most appropriate for you. If you have any questions or would like to find out more information about our solutions, call our friendly team of experts on 01923 277 900 and they will talk things through with you in plain English.

There is no easy answer to the question and the right route for you depends on your personal situation, so we always recommend speaking with us before making a decision. There are a number of things that you need to consider, including:

  • How much turnover and profit you expect to generate
  • Will your customers only work with limited companies?
  • Whether you expect to expand the business in the future
  • What plans you have for pensions and retirement
  • What level of commercial risk will you be exposed to

As you can see, there are a number of things that you need to consider before making a decision on whether to go sole trader or limited. Both structures offer different benefits and we’ll present a comprehensive but straightforward breakdown below.

Should you become a sole trader?

One of the key draws of becoming a sole trader is simplicity. Registering as self-employed is a very simple and inexpensive process. You don’t need to pay any company formation fees, all you need to do is complete a registration form on the HMRC website and you’ll be sent all of the relevant documents in the post, including a UTR Number.

Once you are registered you’ll need to pay National Insurance Contributions and complete a self-assessment tax return each year to notify HMRC of your earnings. Once your return is filed, the tax due will be calculated and you will need to ensure that this is paid to HMRC by the deadline.

Whilst you get the benefit of simplicity there are a couple of drawbacks that you need to be aware of. Firstly, there is less opportunity for tax planning and secondly, you’ll have what is commonly referred to as unlimited liability. This means that you and the business are one; therefore you are personally liable for any debts that the business owes.

To summarise, the key points to remember when it comes to being a sole trader are:

  • There are no set up costs
  • No company formation fees to pay
  • There are less government departments to lease with
  • Minimal administration work
  • Submit just one tax return a year
  • Higher personal risk
  • Less opportunities for tax planning

Should you own a limited company?

In contrast to being a sole trader, should you decide to go down the limited company route, you’ll have to commit some extra time each month but there are far greater tax planning opportunities and other benefits that you can take advantage of.

Let’s say that you earn £50,000 this year. As a sole trader, you would pay income tax on that entire £50,000 (minus any personal allowances that you are due). In contrast, if you were operating through a limited company, you choose how much of that money you want to withdraw from your company each year and you will only pay income tax on that amount. As a result, if you decided to take out £30,000 of the £50,000 you’d be able to leave the remaining £20,000 in the bank and take it out next year if your profits are slightly lower.

Some companies, particularly PLCs and larger companies will only work with limited companies, so if you feel that you could be dealing with such clients; it is likely that you will have to form a limited company. Additionally in contrast to a sole trader, as a limited company owner you will have limited liability and won’t be personally responsible for the company’s debts.

In summary, the key points to remember are:

  • Some companies only deal with limited companies
  • You are separate from the company
  • You can appear more professional
  • Better opportunities for tax planning
  • More admin time is required
  • You’ll have to submit multiple returns to Companies House and HMRC

Our sole trader and limited company solutions

We offer a range of payroll and accountancy solutions to meet the needs of contractors; the two most relevant for this topic being our comprehensive sole trader and limited company solutions.

Limited Company

Our limited company solution is perfect if you are looking for a long-term solution to handling your invoicing, payments and taxes. Setting up and managing a limited company can be time consuming – especially if you aren’t an expert in accountancy. Our qualified accountants can take a weight off your mind by taking away the bulk of your paperwork duties, filing quarterly VAT returns and prepare and file all statutory returns.

Sole Trader

Our solutions are ideal if you want to reap the benefits of self-employment by being your own boss but don’t want to have to worry about keeping on top of mountains of paperwork and invoicing tasks.

We offer two Sole Trader solutions, the standard package covers all of your invoicing and payroll needs and our premium packages also ensures that your VAT and tax affairs are handled properly. With both packages you will be provided with daily pay runs, have access to our reduced rate tax return service and much more.

To find out more information about our solutions, please call our friendly customer care team on 01923 277 900 and they will happily talk everything through with you.

That’s sole trader or limited covered; we have a wealth of other resources that you may find useful, including:

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