Should I be Self-employed or a Limited company?

Self employed Vs Limited company

So, you’ve quit your job, you’ve got your idea, your passion, your goal. You’re excited for what lies ahead. Finally, you are officially your own boss! But wait, your first decision of being your own boss, and a very common question we hear all the time… which should I chose? Self employed sole trader OR a Limited company? Which is better? Well let’s dive a little deeper and look at both options.

Let’s start with the Sole trader self employed business. Let’s outline the basics first by way of bullet points:

  • You register for self-assessment and receive your Unique Tax Reference (UTR).
  • You will file an annual tax return for your earnings for the period 6th April 20X7 – 5th April 20X8. (Filed by 31 January 20X9)
  • You will trade under the business name, but you have no legal right to this name as it is not an official legal entity.
  • You withdraw your money from the business by way of ‘drawings’ which is classed as earnings for tax purposes.
  • You will prepare annual accounts which show how much earnings you have made which feeds into the above tax return. Your first period will commence from the first day you begin to trade as a self-employed sole trader.
  • Your first set of accounts may often be less than a year depending on when you start your sole trader status and when you chose your yearend to be. So, for example, you started to trading on the 1st October 201X and you want your year end to line up with your tax return (31st March) The first period of accounts would be for 1st October 201X – 31 March 201X.

What benefits do sole traders have?

  • You can still run a PAYE scheme and employ people to work for you.
  • It is a simple, yet effective way to start your own business without the worry of company law, filling annual accounts or paying corporation tax.
  • Gives you less admin burden to allow you more time to focus on your business.
  • No corporation (CT600) to file

What are the disadvantages/downside?

  • You are essentially your own entity, you are personally responsible for the company’s liabilities and should you go bankrupt or fold, any outstanding debts would have to be settled by you as the self-employed entity.
  • You do not benefit from Limited liability status.
  • Your income is all taxed at 20% and all chargeable to NI
  • Anyone can also use your business name as it is not a Ltd company the name is not owned by you.

Now let’s look at a Limited company structure.

  • You will still follow the first two bullet points as the self-employed sole trader. So, you will still need a personal UTR and you will still have to file a personal tax return for the 6th April 20X7 – 5th April 20X8. (Filed by 31 January 20X9)
  • You will devise your personal income taken from the business by way of a payroll and dividends as this is the most tax efficient way to withdraw money from the business. Normally, your salary takes up the personal allowance band (so for the 2018/19 tax year £11,850) split into 12 months. Anything else taken out for the business during the year will be classed as a dividend.
  • Shares will be allocated to any shareholders of the business upon set up of the company. This gives legal rights to the company and its assets.
  • You will register your company on company’s house, you will trade under the company’s name with a bank account set up in the company’s name.
  • A CT600 (company tax return) will need to be filed within 9 months after the company’s year end date, and any outstanding corporation tax being paid by this date.
  • You will need to file an annual set of accounts to both company’s house and HM Revenue & Customs.
  • A payroll can be run in the company’s name.
  • You will need to open a Limited business bank account.

What benefits does a Ltd company have?

  • The directors are separate to the company.
  • The directors benefit from Limited liability status.
  • Directors can be paid via salary and dividends which is the most tax efficient way to draw money from a business.
  • Tax efficient above a certain turnover/profit (£30,000/£35,000)
  • General view being a Limited company improves credibility/reputation
  • Legal right to chosen name of the business. i.e. no one else can trade under the same name.
  • Easier access to finance
  • The business would be easier to sell, should the opportunity arise.

What are the disadvantages/downside?

  • Accounting bills can be higher as more administration work
  • Your accounts are published at company’s house, however the profit and loss is excluded.
  • More administration work as the company will have to file a CT600 and set of accounts. The directors will still need to complete a personal tax return in addition.

All the above should help guide you as to which side to tackle. There are other factors which may play into your scenario, but we hope the above helps your decision to become a litter clearer.

Whether you want to incorporate a limited company or start yourself employed journey, or simply if you would like some advice as to what’s best for you and your business please get in touch, we would love to help.