Limited or Sole Trader?

(3 minutes to read)

This is one of the most common questions we get asked – and the answer is different for everybody. Depending on your personal circumstances, you might be better off as a sole trader or as Director of a Limited Company.

Your income is a key determining factor, but it is also worth considering your appetite for risk, your future plans for your business and the amount of administration you are happy with.

This guide will examine the key differences between operating as a sole trader – commonly referred to as ‘self-employed’ – and as a company Director. So first thing’s first – what’s the difference?

What is a Sole Trader?

If you are a sole trader, you register as self-employed with HMRC. At the end of the year, you report your income, expenses and tax/National Insurance liability with HMRC on your self-assessment personal tax return. All income you earn is taxed based on your personal tax allowance and income tax bandings.

A sole trader is not a separate legal entity to the contractor. As such, the contractor is personally liable for any debts or losses their business makes.

What is a Limited Company?

A Limited Company is a separate legal entity and so is taxed separately to its directors, shareholders and employees. In a one-man-band Limited Company, the contractor is all three!

A Limited Company is subject to Corporation Tax and pays money both as salary (to any employee) and dividends (to a shareholder). As the name suggests, liability in a Limited Company is limited – which means that only the company is liable for genuine debts and losses incurred by the company.

Limited or Sole Trader?

If your contract income is low – typically under £25,000 per year – then the tax efficiencies available to Limited Companies are usually outweighed by the administrative costs. If your income is stable and won’t fluctuate much, there is also no need to leave profit in your business and spread it out. There is additional administration involved in operating a Limited Company – quarterly VAT returns for VAT-registered businesses and company accounts, as well as a personal tax return at the end of the year. In these cases, operating as a sole trader is likely to be the best option.

If you are earning over £25,000 per year, or your income will vary from one year to the next, the additional tax efficiencies available in a Limited Company will be your friend. If the day-to-day running of your business has lots of additional costs and expenses, you will benefit from the wider business expenses allowable. If your contracts are higher-risk or put you at personal liability, you will certainly want the protection offered by a Limited Company – if worst comes to worst, you are not risking your personal assets. In these situations, a Limited Company will be the best choice for you.

Ready to join our contracting revolution?

Join us now

Other things to consider.

Credibility. Operating a Limited Company can make you more respectable in the eyes of many clients and suppliers. Indeed, some businesses will refuse to deal with a sole trader and will only engage with a Limited Company.

Tax planning. The structure of a Limited Company offers a much greater scope for tax planning. If you are planning to be in business for a few years and can afford to take a long-term view, you will extract much more value from a Limited Company, than as a sole trader.

Scalability. If you are hoping to grow your business, including hiring staff, working with a partner or increasing future income, a Limited Company offers a ready-made structure to do this.

Succession. If you ever want to sell your business, or decide to retire, it is far more difficult to pass on a self-employed business structure than a Limited Company. Being able to appoint Directors and sell shares, makes transferring ownership much simpler.

We hope this guide has been helpful. If you are a sole trader planning on setting up a Limited Company, our guide to moving from self-employed to Limited will be useful.

If you are looking for more information, one of our specialist contractor accountants will be happy to discuss your options – give us a call on 01442 795 100 or email sophie.lewis@dolanaccountancy.com.

Why Dolan Accountancy?

Dolan Accountancy was set up by Simon J Dolan, the man behind the well-known brand SJD Accountancy. With over 25 years experience in the contracting marketing, Dolan Accountancy has the heritage, reputation and credibility you can trust. Working closely with our sister company, ContractorUmbrella, it means we can offer one low cost, fixed fee package at £95 + VAT per month. This gives you the flexibility of using both our Limited Company Accountancy Services and our award winning Umbrella Service, for one inclusive cost. We don’t believe in tiered packages or hidden extra fees, instead we aim to give you everything you need, including:

  • Free Company Formation – This is where it all begins. Once you have decided on an available name, we will form your company free of charge (if using our accountancy services) and it will be ready for you to use in as little as three hours.
  • Free use of ContractorUmbrella – With changes in Public Sector IR35 Legislation we understand that sometimes you are required to contract via an umbrella company. We will keep your limited company ticking over, while you work margin free via our sister company, ContractorUmbrella.
  • A Dedicated Accountant – Your accountant will be there for any company or personal tax advice that you require. We will never outsource work, even to internal teams.
  • Free Access to FreeAgent – The founder behind the multi award winning FreeAgent platform was one of Simon’s first clients, therefore it only seems fitting that we offer all of our clients access to FreeAgent, free of charge.
  • Free Business Banking – We have decided to waive our commission so our clients can use Tide free of charge for the first year.
  • Unlimited IR35 Status Reviews – We will review all of your contracts for IR35 purposes and provide you with our professional opinion as to its status.
  • Free Registered and Director’s Service Office Address – Sometimes you just don’t want your home address on display at Companies House. When you sign up to our accountancy services, we will offer the use of our address as an alternative.
  • Your Business and Personal Taxation Needs – This includes Company Accounts, Director’s Personal Tax Return, VAT Returns, Payroll, Corporation Tax and Dividend advice, to name just a few.

If you’d like to find out more about how Dolan Accountancy can help you and your business, please give us a call on 01442 795100 or email sophie.lewis@dolanaccountancy.com or jaime.thorpe@dolanaccountancy.com.

dav1