Our handy guide to the pros and cons of being self-employed as a sole trader or setting up a Limited Company

 

If you are starting out in business your first question is likely to be what is the best way for me to do it, and do I really have to set up a new limited company?

You can easily be self-employed as a sole trader or a member of an unincorporated partnership, and there are lots of pros and cons to taking these routes, as there also are in deciding to use a limited company.

The key is choosing which way works best for you and your circumstances and getting expert advice before moving ahead is probably the wisest decision you can take.

The benefits of being a sole trader

Working self-employed is often the favourite way people go into business, because of its simplicity. Take the decision, inform HMRC online of your new status as ‘self-employed’ in minutes, and you’ve done it – and can start working for yourself straight away with no fees and no hassle.

Of course, there are lots of HMRC rules to get your head around, and you’ll probably want to discuss your personal situation with your accountant before you start out and begin making financial commitments.

But you’re up and running immediately, with no incorporation, minimal expense and less requirement for bookkeeping, accounting and administrative filing than with a limited company.

You can do your own accounts and make your self-assessment return to HMRC online if you have the time and feel up to it. And accountancy fees might well be lower when you’ve grown and decided you do need regular bookkeeping help.

If you’re a private person, there is no public disclosure of business details and profits or losses – and all the profit is yours.

You don’t have to have a limited company once you start earning over a certain level, despite common perceptions. However, you do miss out on some of the tax, risk and credibility benefits of the limited company route.

The upsides and obligations of having a limited company

The perception is that going the limited company route is more formal and complex, more onerous and costlier. At first glance that is the case. However, an expert accountant like Oscar Fairchild can mitigate these potential downsides for you, and allow you to benefit from:

• tax planning advantages
• higher take-home pay
• reduced personal liability

You are likely to pay less tax if you take a small salary from your limited company. This is because limited company profits are subject to a lower Corporation Tax rate (currently 19 per cent) than Income Tax (20 per cent at Basic Rate). You’ll also receive company dividends as a shareholder.

A sole trader is a single entity with their business for tax and administration purposes, whereas a limited company is a distinct entity. So, unlike the self-employed who have no protection if things go wrong, you’re not liable for financial losses by your business.

Nevertheless, the responsibilities and admin burden are greater for a limited company, as you must comply with company law, and face harsh HMRC penalties if you don’t make statutory returns correctly and on time.

That’s where an expert accountant can come in, manage your obligations under the Companies Act, and increase your earnings potential by making you tax efficient.

With the naming protection a limited company registered with Companies House has over a sole trader, the tax advantages of employees’ pensions being legitimate business expenses, and the boost to your professional perception when viewed by other companies, you may be swayed in this direction.

But higher set-up and ongoing costs could well be the deciding factor for you when weighing up the sole trader vs limited company debate.

Is VAT a deciding factor?

It’s commonly thought that if you need to be VAT registered you’ll need to have a limited company. But that simply isn’t the case.

Being VAT registered is all about your turnover. You need to register for Value Added Tax purposes if your ‘taxable supplies’ (your turnover) over the past rolling 12 months exceed the VAT registration threshold (£85,000 from April 2017). But that can equally be as a sole trader, partnership, or limited company.

VAT matters can be complex and having an expert accountant on board is strongly advised. But VAT shouldn’t sway the sole trader or limited company argument one way or another.

Should you worry about IR35?

IR35 is tax legislation in force since the 2000 Finance Act to stop contractors working as ‘disguised employees’ for companies, to combat tax avoidance.

Again, decide if you’re happier working through a limited company rather than as a self-employed contractor depending on your circumstances and who you’re being paid by.

However, if you choose the limited company route but don’t want to be classed as working ‘inside IR35’ and challenged by HMRC, make sure you get help from your accountant in filing your tax paperwork and avoiding late returns to keep you off HMRC’s radar.

And ask them to review your contract to ensure you’re not controlled like an employee and having the same benefits and responsibilities.

Get expert advice to help you decide

Whatever route you think works best for you, don’t decide on your own – working with a bookkeeping and accountancy partner like Oscar Fairchild makes perfect sense for your growing business.

 

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About Oscar Fairchild:

Oscar Fairchild (incorporating Redwood Clarke since 01.09.18) is an Association of Accounting Technicians (AAT) qualified accountancy & bookkeeping practice with offices in The City of London and Billericay, Essex. Offering a wide range of services including Self-Assessment Services, Annual Returns, VAT Returns, Credit Control, Payroll, Auto Enrolment Pension and Management Account services to high growth businesses across London, Essex and Hertfordshire.

Contact us today to discuss how our flexible outsourced accountancy & bookkeeping service could deliver consistent, professional help to your business >>.