Sole trader or limited company for freelancers? Pros & Cons
It can be daunting to decide whether you should operate your business as a sole trader or limited company as both options have their own perks and drawbacks.
No matter how small your business may be, you have to choose appropriate legal structure for tax purposes.
Sole Trader
Operating as sole trader or self-employment is very simple business structure whereby one person is solo owner of a business. The sole trader status can be setup on GOV.UK website. Majority of freelancers work as sole traders due to simplicity as minimal paper work is required with this approach. The sole trader is solo owner of any profits or losses made by the business.
Pros
- Less paper work to worry about as no record keeping is required
- Less admin work as submission of only one self-Assessment return is required
- No requirement of filing Annual accounts
- More privacy as there is no requirement to make any information available to public
Cons
- Tax savings are less compared to a limited company
- Expenses are not tax deductible
- Your personal assets are not protected and can be taken away if you don’t pay your creditors
- Your personal credit rating can limit your business’s borrowing capacity
Limited Company
A limited company is an individual legal entity separate from its owners, directors or managers. One person can run a limited company by acting as both director and shareholder of the company. If a freelancer sets up his/her own limited company then he/she is usually director of the company and is entitled to salary from the company and can also receive dividends from any profits made by the company. Directors of a limited company are responsible for timely filing of accounts with company’s house and submission of tax returns to HMRC ever year, failure in doing so can result in severe penalties
Pros
- You can make more tax savings by paying 19% Corporation Tax on company profits, and using dividends alongside salary as dividends are taxed from 7.5% for basic ratepayers
- Business expenses such as travel, mobile subscription and subsistence etc can be claimed and deducted from profits which will also save you further tax
- Your personal assets are protected if the business faces any financial difficulties as limited company is a separate legal entity
- Business’s credit ratings will be separate to that of the owner
- Your business opportunities can increase as some big businesses have procurement policies which allow them to work with just limited companies
- It is easier to expand the business by bringing managers or adding associates
- Limited companies can claim tax reliefs such e.g. research & development relief
- A limited company has its own distinct identity as once a company name is registered with companies house; no other business can use the same name
Cons
- Accounting is not straightforward as limited companies are required to file annual accounts and annual tax return
- Limited companies need separate bank account
- More admin work is required due to increased record keeping
We hope we have helped you by explaining both options, if you need further advice in making the right choice for your business then
get in touch with us
