Should I incorporate as a limited company or work as a sole trader?

Setting up a limited company and operating as a sole trader each have their own advantages and disadvantages, and it’s important that you take the time to consider the pros and cons of each. To help you come to the right decision, here are the main aspects to consider.

Setting up a limited company

The limited company structure offers many tax advantages but there is also more administration involved, as well as the legal obligations you take on when you hold office as a director.

Here are the main benefits and drawbacks of incorporating as a limited company:

Advantages

• The company is a separate legal entity from its directors
• Your liability as a company director is limited to the amount of money you put in
• You can be an employee of the company as well as a director – this means you are eligible for workplace benefits such as redundancy pay, should the business fail
• Directors can reduce their tax liability by taking a combination of a small monthly salary, plus dividends at intervals throughout the year, as long as the company can support these payments
• The limited company structure offers more flexibility when withdrawing profits – this can result in tax savings for directors if profits are retained for future use within the company, rather than extracted as income.
• Incorporation offers you more credibility in some sectors
• Your business name is registered at Companies House, and receives protection as a limited company
• Depending on your turnover, your limited company may pay less tax – corporation tax is charged at 20% on profits whereas sole traders pay income tax plus Class 4 National Insurance contributions on profits
• You can claim tax relief on a wider range of expenses as a limited company

Disadvantages

• Setting up a limited company is more complex
• The administrative aspect of running a limited company can be a burden, and you’ll need to hire an accountant to complete your company accounts
• Statutory accounts and the company’s tax return must be filed online at the end of your financial year, along with a confirmation statement (formerly known as an Annual Return)
• Your salary and any bonuses as a company director will attract employer’s and employee’s National Insurance
• Changes in dividend taxation mean the tax advantages previously available are not as attractive

Working as a sole trader

Setting up as a sole trader is the easiest way to start your business, with the minimum requirement being to register with HMRC. There are other benefits and drawbacks to consider, however, so let’s have a look at these:

Advantages

• There are minimal administrative responsibilities as a sole trader when compared with company directors
• You have full control over your own business, and don’t have to refer to other directors or shareholders before making decisions
• Your business can be more ‘agile’ and respond quickly to changes in the market
• Start-up costs are generally low as a sole trader, with less need for professional advice
• It’s easier to change your mind later, if you decide to incorporate when your business more established

Disadvantages

• The business name you choose is not protected, and could be used by others
• Sole traders can find it more difficult to obtain funding to grow their business
• Your personal liability for any debts incurred by the business is not limited, resulting in a greater potential risk of personal bankruptcy

If you would like to know more detail about your choice of business structure, Handpicked Accountants can recommend a highly qualified and reliable accountant in your area.