It’s great that you are wanting to go solo with your career. There are many benefits to doing it on your own, including; being your own boss, choosing which hours you work, having control over your holidays as well as the freedom to work with whoever you want.
Taking the leap to manage your own business however, does come with a lot of responsibility. You may no longer be on the payroll meaning you won’t receive the same salary every month and you often have to make sacrifices and reinvest your money in order to make profits or be successful.
You, have of course have decided to take the leap into ‘going solo’ and we think that is brilliant! It’s great to see new, inventive businesses popping up with the Covid-19 pandemic really shining light on that. Despite the pandemic, the number of new businesses rose 14% with people turning their lock down hobbies into full time, paying jobs.
One of the questions however that we find new starters asking themselves is; ‘should I become a sole trader or a limited company?’. We are here to answer that question for you.
What is a sole trader?
A sole trader is a single person who has full ownership of their business. This means that you do not have a separate legal identity from your business and you take full liability.
To become a sole trader, you must register online using the government portal within three months of founding your business.
What is a limited company?
A limited company is different to being a sole trader in that the business is legally distinct from the identity of the owner. In other words, the owner and the business have their own identity. Limited companies need to be registered on Companies House (for a small fee). Such businesses can have more than one director and their personal finances are not at risk.
Sole traders keep all of their earnings after tax with is paid through the self-assessment tax system. So, your earnings are dependent on your performance that year – there is the potential to earn large profits but also the risk of a lower salary.
Those who have a limited company work differently as they draw their earnings via a salary which is taxed at standard P.A.Y.E rates. They can also take dividends if the company is profitable attracting lower tax rates.
As limited companies are registered with Companies House, they must pay corporation tax. Sole traders however are not legally obliged to pay any corporation tax, instead they are required to pay income tax at the standard rate and make National Insurance contributions on all profits.
Being a sole trader allows you to have complete freedom and control over the running of your business and there is generally much less admin. This however, comes with the increased level of personal risk.
Directors at limited companies however are very unlikely to be accountable for debts or lawsuits by the business, where as a sole trader could be declared bankrupt.
How to decide
Deciding which path to choose usually starts with deciding which type of business you would like to set up. Small enterprises or those who are self-employed may find it easier to establish themselves as a sole trader to avoid the added responsibility and admin that comes with being a limited company.
Those with ambitions to start a company with lots of employees and large growth however, may decided to take the latter option and register as a limited company.
We hope this information has helped clear up a few questions about what being a sole trader and limited company entails but, if you do have any questions or would like help registering as either, please don’t hesitate to get in touch.