Is it better to work as sole trader or as a limited company?
It's a question you might well be asking yourself, and when you first set up your business, it is important to evaluate which structure suits you best. In this article we look at the perks and drawbacks of operating as a sole trader vs a limited company and help you make the decision.
What’s the difference?
If you decide to set up as sole trader, you will need to register for self-assessment with the HMRC website. Following the end of the tax year in April you will need to fill out a return, outlining your profits, expenses and any additional personal income. Anything over £10,000 for the tax year 2014-2015 will then be taxed.
(Register for self-assessment here: https://www.gov.uk/register-for-self-assessment/overview)
As a limited company you will need to register with Companies House, where you need to decide your company name, address and at least one director and shareholder. You will also need to provide documentation on your initial shareholders, company rules and share details. Further information can be found on the gov.uk website.
(Check it out for more information: https://www.gov.uk/limited-company-formation/overview)
As a limited company you will need to register for corporation tax within 3 months of trading. ‘Small profits’ rate of tax is 20% for businesses that have profits up to £300,000 each year. As a sole trader you would not need to register for this, however would still be subject to taxation through your self-assessment at the end of the financial year.
The Stigma of the Sole Trader?
Many sole traders will find themselves registering with Companies House if a large amount of their clients only deal with limited companies. It could be said that there is a certain gravitas associated with having a registered business with a good registered business address, leading people to have less than favourable views of sole traders. That said, this is not true for all clients!
Protection and Retaining Profits
As a limited company you may find yourself more protected against risk, particularly if you are in a data-sensitive industry like IT. On the plus side you also have the option to retain your profits and taxation for the following financial year, something not available to the sole trader.
Sole Trading is Simpler
While there are limitations and risk associated with the sole trader route, it is undoubtedly easier and simpler to set up shop than going through the process of becoming a limited company. Depending on the sensitivity of your data and the mind-set of your clients, you may find you enjoy the flexibility that comes with operating as a sole trader.
What do you think is best for your business? Tweet at @CityVirtualHub or leave your comments for us below.