Sole Trader vs Limited Company

Frequently asked question: sole trader vs limited company

Hey folks, let’s talk about business structures!

So, you’re thinking about diving into self-employment? Awesome! But before you take the plunge, it’s crucial to understand the different setups – namely, sole trader vs limited company – and how they’ll impact your journey.

Sole trader: keeping it simple

Picture this: you, running the show, no frills attached. If you are a freelance photographer, hairdresser, or plumbers, that’s the sole trader’s life. As the sole proprietor, you call the shots and handle everything solo. But here’s the kicker: with unlimited liability, you’re personally on the hook for any business debts – meaning your personal assets could be at risk. Yikes! On the bright side, admin tasks are a breeze, and tax filing is straightforward through self-assessment.

 

Limited company: level up your game

Now, let’s talk about limited companies – the big leagues. Here, your business becomes a separate legal entity, offering a shield against personal liability. But with great power comes greater admin responsibilities. Think annual filings, statutory registers, and corporate tax returns. It’s a bit more complex, but the tax perks and professional appeal make it worth considering, especially if you’re eyeing long-term growth and scalability.

Sole trader vs limited company: pros and cons

When it comes to choosing between setting up as a sole trader or a limited company, freelancers and contractors should carefully weigh their options. Each structure has its advantages and drawbacks, but a good accountant will guide you through this decision and ensure you’re making the right choice for your business needs.

Sole trader: simplicity, but at a cost

• Pros:
  • Easy setup & minimal admin: registering as a sole trader is quick, with little paperwork involved, and ongoing administration is simple.
  • Full control: as the sole owner, you make all decisions and retain all profits.
  • Direct tax filing: you submit taxes through self-assessment, which can be easier to manage than company accounts.
• Cons:
  • Unlimited liability: you are personally liable for any business debts, which put your personal assets at risk.
  • Tax efficiency: sole traders are taxed via income tax, which can become less tax-efficient as earnings increase.
  • Limited growth potential: as a sole trader, you may struggle to scale or attract larger clients, especially in sectors that prefer dealing with limited companies for credibility and protection.

Limited Company: Protection and Tax Efficiency

• Pros:
  • Limited liability: Your personal assets are protected—you’re only liable for the amount you invest in the company, which can offer peace of mind.
  • Tax efficiency: Limited companies benefit from corporation tax, which is often lower than income tax, and offer opportunities to pay themselves through dividends, which are taxed at a lower rate.
  • Professional image: Having “Ltd” attached to your business name can enhance your reputation and credibility, attracting larger clients.
  • IR35 Protection: Operating as a limited company can help shield contractors from IR35 legislation, which targets disguised employment. However, compliance is key, and an accountant can help ensure you operate within the rules.
• Cons:
  • More paperwork: Setting up and maintaining a limited company requires more admin, including filing annual accounts, VAT returns, and dealing with payroll.
  • ongoing costs: There are costs involved in accountancy services, legal compliance, and corporation tax filings.
  • IR35 considerations: If you’re a contractor, navigating IR35 regulations can be tricky. This tax law impacts contractors who operate like employees but use limited companies to avoid tax. A knowledgeable accountant can help ensure you’re on the right side of this legislation.

Why a limited company might be right for contractors and freelancers

For freelancers and contractors, particularly those earning higher incomes or working with multiple clients, a limited company can offer significant advantages in terms of tax efficiency, professional credibility, and legal protection. However, the decision isn’t always straightforward—especially with considerations like IR35.

Decisions, Decisions: What’s right for you?

When it comes to choosing the right structure, it all boils down to your goals and risk tolerance. Are you in it for the long haul? Looking to minimise financial risks? Dreaming of tax efficiencies? Take stock of your ambitions and capacity for admin – it’ll help steer you in the right direction.

Why Accrue Accounting?

Now, here’s where we come in. As your go-to accounting experts, we’ve got your back every step of the way. Whether you’re a solo act or ready to level up, our tailored accounting packages and dedicated support ensure your finances are in tip-top shape. Plus, with our unlimited advice and software included within your monthly fee, managing your accounts has never been easier. 

Our Trustpilot reviews will demonstrate how we have helped many sole traders and limited companies. Ready to leap? Let’s chat! Reach out to our team today or request a callback. We’ll help you navigate the maze of business structures and set you on the path to success.

Cheers to your entrepreneurial journey! 🚀