Sole Trader or Limited Company - Blog

Sole Trader or Limited Company?

One of the first choices you make as a fledgling business is if you will trade as a Sole Trader or become a Limited Company, you will have needed to decided upon which way you want to go when you regsiter as self-employed with HMRC.

So, here are the pros and cons of registering as either sole trader or a limited company.

Sole Trader

Limited Company

  • There’s no set divide between the business owner and the business itself. Any debts from the business are your debts and any personal assets – including your home are not protected should you need to repay them.
  • If you set up as a Limited Company the company is its own legal entity and as a shareholder, you will have a set limited liability – “limited by shares”.
  • As a Sole trader to pay tax on your business profits via a self-assessment tax return. Currently, this can be filed via a paper assessment form or online. Some sole traders hire a bookkeeper or accountant but you can also file your accounts your self.
  • Your Tax contributions will be taken from your Directors salary via Pay As You Earn (PAYE) and paid at regular intervals to HM Revenue & Customs (HMRC). As a director, you are also obliged to complete a tax return unless you’ve received absolutely no pay or benefits; irrespective of whether any tax is owed. For limited companies of any size, corporation tax is charged at 19%.
  • For National Insurance you pay Class 2 contributions of £158.60 (£3.05 per week) if your profits are £6,475 or more a year. You pay Class 4 contributions if your profits are £9,501 or more a year. These are 9% on profits between £9,501 and £50,000 2% on profits of over £50,000. Rates accurate for 2020/21.
  • National Insurance (NI) is payable through your directors’ salary and any bonuses.
  • As a Sole Trader, you are not legally required to have or file full annual accounts. However, you must retain evidence of business expenses and income to fill in your tax return.
  • You must prepare annual accounts from the company’s records at the end of the financial year, these are filed with HMRC as part of the company tax return and sent to all shareholders and Companies House.  A Limited company must also file a Confirmation Statement with Companies House, which includes information about the directors, shareholders, and registered office.
  • Some contractors and agencies will not work with a sole trader, instead preferring only Limited Companies due to their legal protection. Expect to be asked about your standing during the initial discussion phase.
  • Being an incorporated company gives the impression of a soundly based organisation and may appear more credible to some people. However, it is worth noting being a Limited Company does not guarantee your reliability, a point worth remembering when signing a contract with one.