When setting up as self-employed, it’s important to understand the routes available to you.

It’s a legal requirement to register a structure with HMRC, and inform them of your change in circumstances, if you are transitioning from working for a company to working for yourself.

In this article, we will discuss the differences between being a sole trader and establishing a company.


What is a sole trader?

A sole trader is somebody who is self-employed and the sole owner of their business.

This format is popular with many who are newly self-employed as it is perhaps the simplest to set up using the Gov.uk website.


What is a limited company?

The major difference between a limited company and a sole trader is that a limited company has its own identity in the eyes of the law that is distinct from the individual.

You can operate a limited company even if you are working alone as the sole shareholder and director.


Sole trader v limited company

There are advantages and disadvantages to both routes and much depends on the size of your operation, your ambitions and your financial situation.

If keeping admin to a minimum is a priority for you then sole trader could be the best option, at least at the start of your journey.

Being registered as a sole trader also protects your anonymity, with no details listed publicly, and this could be an important consideration for those just finding their feet.

However, a sole trader does not enjoy the limited liability that companies have.

This means that any debt accrued by a sole trader could result in the loss of personal assets if you are unable to pay.

On the other hand, by its nature a limited company is a separate entity, so your personal assets would be safe.

You may also find it more difficult securing loans and investment as a sole trader, as many financial houses, including banks, prefer to do business with limited companies.

And while being a sole trader keeps things simple, as you earn more you will find that there are healthier financial incentives available to companies.

For example, a limited company pays corporation tax on profits instead of income tax, and at the moment the corporation tax rate is lower than the income tax rate.

There are also more incentives, allowances and tax deductions available to companies, while your brand name is better protected as a company.


Ditch the paperwork

As we have discussed, registering as a limited company does carry with it a little more paperwork and there is also a small fee payable to incorporate your business.

Cooper Accounting can help minimise this cost, in terms of your time and money, incurred when transitioning from being a sole trader to a company.

We can also guide those setting up for the first time through the process.

Get in touch today for an informal chat.