Should You Be a Sole Trader or a Limited Company?

I was chatting with a potential client the other day (over a virtual coffee of course!) and the age-old question came up – “Should I be a sole trader or limited company?” It’s probably one of the most common questions we get asked, quite rightly so.

After a bit of a chat she said “you should write this up on your website for others” so here we go.

Let me share some thoughts based on my experience working with both sole traders and limited companies over the years.

Starting Simple – The Sole Trader Route

Remember when you were learning to drive? You probably started with a smaller car before moving up to something bigger. Well, being a sole trader is a bit like that starter car – it’s straightforward to get going and easier to handle.

You simply need to register with HMRC (we can help with that if it’s too scary!) and that’s you in business.

It’s perfect if you want to test the waters without drowning in paperwork. Just be careful – there’s no separation between you and your business, you’re both one in the same in HMRC’s eyes. That means if things go wrong, your personal assets could be at risk.

• You are personally responsible for all business liabilities.
• If the business accumulates debt or faces legal action, your personal assets (like your home or car) could be at risk.

The good news? You keep all your profits (after tax, of course).

You’ll need to file a Self-Assessment tax return once a year to tell HMRC about your income and expenses, so make sure you keep a record. The tax year runs from 6th April to 5th April the following year, and your Self Assessment tax will be due by 31st January following.

Despite the risks, lots of small businesses and freelancers prefer this structure – it’s simple, requires minimal admin, and taking money out of the business is super easy.

Taking It Up a Notch – Limited Company

This is where things get a bit more sophisticated. Think of a limited company as putting a protective bubble around your business. It’s a separate legal entity (fancy way of saying it’s independent from you), which means your personal assets are protected if things don’t go to plan.

You, as the director, are responsible for running the company, but its finances are separate from yours so don’t use the business bank account like a personal bank account. The company’s profits belong to the business, and you get paid via salary or dividends.

But (there’s always a but, isn’t there?), with greater protection comes greater responsibility and a fair bit more admin. You’ll need to submit a Confirmation Statement, file annual accounts with Companies House and submit Corporation Tax returns. That’s how you tell HMRC how much Corporation Tax you need to pay on your profits. You settle this nine months and one day after the company’s financial year-end.

It’s a lot more complicated but don’t let this scare you – that’s what people like us are here for!

So, What’s Right for You?

If you have a low-risk business with minimal overheads and want a hassle-free setup, a sole trader structure might be the best option.

If you are looking to grow, hire staff, or protect your personal assets, then setting up a limited company could be the better choice.

But as ever, we suggest speaking to an accountant and talking it through with them.

Don’t Get Stuck in Analysis Paralysis!

Here’s something I often tell my clients – don’t let this decision stop you from getting started. You can always change your structure later (we’ve helped a few clients make the transition).

The most important thing is to take that first step. Whether you choose to be a sole trader or limited company, I’d love to help you get set up properly from the start. Why not book a discovery call with me? We can chat about your specific situation and figure out what’s best for you.

Remember, every successful business started with someone making that first decision. Is today your day?