Limited Company Vs Self-Employed

limited company vs sole trader
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When you are initiating a new business, the main question is your business’s legal structure. Most of the time, you would have started your business being self-employed as it’s simple to setup and manage.

Self employed or limited company?

The self employed structure is popular amongst freelancers, because setting up as a sole trader is more straightforward than establishing a limited company. That said, being a limited company makes you much more appealing to clients, investors and suppliers.

Here we looks at the pros and cons for each.

The benefits of being self-employed

Being a sole trader is easy because all you need to do is notify HMRC if you have earned more than £1,000 between the 6th of April and the 5th of April of the following year and enrol yourself as self-employed. Remember, however, that this value is likely to change over time.

Registering with HMRC is easy, as you can do so by filling in a form online. Hence, you do not have to incur any extra costs to register for this. Also, you will have the maximum privacy by being self-employed compared to the other business structures who have to show and publicly declare their finances for all to see.

If you feel like moving forward and expanding your business, self-employment will allow you to do that. Under this you can easily modify your business structure. Before that, you should decide on the proper format for your business, since if it is improper, it could cost you a tax bill that is significantly greater than it should be, and it may be a burden for your business.

The disadvantages of being self-employed

Being self-employed means that you will have unlimited liability with your business, indicating no legal difference between you and your business. So, if your business gets into debt, you are personally liable for all the debt, and you need to risk your properties to settle the debts.

If you profit as a self-employed individual, you need to pay the personal income tax. If your profit falls between £0 and £50,270, you will have to pay the introductory rate of 20% and if it is between £50,271 to £150,000, the higher rate of 40% on income and the additional rate of 45% for income over £150,000.

Furthermore, you will have to pay class two and class four National Insurance as a self-employed individual. This higher taxation might result in an adverse impact on self-employed businesses.

There is also a difficulty to raise the funds when you want to expand your business. Therefore, you will need to evaluate the options and see if you can find another funding method or change your business structure. You will also be less attractive to your clients, investors, suppliers, and competitors by being self-employed.

Therefore, the critical point is selecting which structure works best for you and your business with its circumstances and getting advice from an expert accountant before moving forward.

How to become a limited company

In this case, forming a limited company is one of the wisest decisions and the most popular options for self-employed sole traders. Incorporating a new limited company is more formal and has many legal requirements during the company registration process.

Companies House is the governing body for registering all limited companies in the UK and maintains the registry of companies. Before you incorporate your business as a limited company, you must register it with the Companies House.

You will receive the following after registration.

  • Memorandum of Association – this will include the names and addresses of endorsers establishing the limited company.
  • Articles of Association – this outlines the directors’ powers, and any shareholders’ rights, etc.
  • Form IN01 – containing details of the directors, company registered address, company name, company secretary details, details of any share capital, details of the shareholders, and details on any Person with Significant Control (PSC).

There are some high-level requirements that all limited companies should comply with, such as filing the company accounts, confirmation statement, and corporation tax return annually. Though it is complicated to tackle these, an expert accountant such as WIS Accountancy Ltd can help you soften this process and make it easy to incorporate the company and run it smoothly.

The benefits of being a limited company

A limited company possesses its own identity, which is independent of that of its shareholders and directors. Hence, you can have the benefit of limited liability, which protects your assets when it comes to debts. You only hold to lose what you invested into the company.

Also, limited companies stand to be more tax-efficient than sole traders. Rather than paying income tax, they can pay corporation tax on profits, at a fixed rate of 19% for all your profit despite the turnover limit. This offers a kinder tax rate than the higher income tax rates you would have to pay if you are self-employed.

Also, all employees and directors should sign up for PAYE and National Insurance contributions. Company directors pay their self-assessment tax based on their company salary and dividends. To take the gain of limited company tax benefits, some directors choose to pay themselves a lower salary so they can leave profits in their business rather than paying tax on them. This also lowers National Insurance contributions. Apart from this, the directors can still pay themselves cash in dividends should they wish to withdraw from the company. Hence incorporating a limited company can be more profitable for you.

Furthermore, your limited company will have a specific reputation that self-employers do not have. This reputation can help attract new investors and clients and to create a professional brand for your business.

Besides these, you can also have proper tax planning to decrease the corporation tax. You can keep hold of surplus income in the business to pay your future operational costs and growth. This ability makes more meaning than withdrawing all profits, paying higher rates of income tax, and reinvesting your finances when the business needs additional capital.

Also, you will have a wide range of expenses which you can claim through the limited company. Expenses count as a tax deductible if incurred solely and wholly through the course of doing business. Knowing the business allowable expenses and allowances will assist you in getting an extra opportunity to reduce your taxes.

To summarise

Suppose you have to choose between self-employed and limited company. In that case, you need to consider the differences between each structure. It could impact everything from profits to paperwork and your future business plans to expand your business. If you are not sure about deciding this, it’s always best to have advice from an expert accountant such as WIS Accounting.

To find out more, contact us by filling out our information form or call us on 0203 011 1898.

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