Limited Company vs Sole Trader: Which Is Right For You?

Limited Company vs Sole Trader: Which Is Right For You?

Deciding Between Limited Company and Sole Trader

When exploring opportunities in self-employment, you'll encounter various legal business structures. For many, the choice often boils down to establishing a Limited Company or operating as a Sole Trader, both recognized as lucrative and compliant ways of working.

Limited Company

A Limited Company functions as a distinct legal entity, separate from its shareholders and directors. It has its own financial standing, can engage in contracts independently, and is responsible for its taxes. In contracting scenarios, this setup is often referred to as a Personal Service Company (PSC).

Sole Trader

A Sole Trader is a self-employed individual who owns and operates their business independently. It stands out as one of the simplest and widely adopted business models among the self-employed, allowing individuals to commence trading and file a Self-Assessment Tax Return at a later stage.

How to Decide?

The choice between these legal structures depends on factors such as the nature of your work, projected earnings, and your willingness to handle administrative and accounting tasks. Each structure has its advantages and disadvantages.

Sole Trader Advantages

  • Simplified paperwork compared to Limited Companies, with no annual submissions to Companies House or HMRC.
  • Lower expenses, especially if you opt for an accountant.
  • Greater privacy as there is no mandatory public disclosure of directors and shareholders.

Sole Trader Disadvantages

  • Personal liability for business debts and legal issues.
  • Limited trust from banks and investors, potentially affecting loan and investment opportunities.
  • Different tax rules, potentially leading to higher tax payments as earnings increase.

Limited Company Advantages

  • Separation between personal and business entities, offering protection for personal assets.
  • Tax benefits with Corporation Tax on profits and the ability to pay through a combination of salary and dividends.
  • Eligibility to claim various business expenses and establish a business credit rating.

Limited Company Disadvantages

  • Additional responsibilities, including filing annual accounts, company tax return, and a confirmation statement.
  • Time-consuming due to increased paperwork and accounting obligations.
  • Public disclosure of business details, which may not appeal to everyone.

Seeking Advice

Selecting the right legal structure is a crucial decision, and individual preferences vary. Seeking specialist accountancy advice is recommended to understand the responsibilities and expected pay rates associated with each option. RFNG Consulting provides expert accountancy advice to contractors, freelancers, and the self-employed community, guiding you through the decision-making process. Feel free to reach out for tailored guidance.

Back to blog