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Limited Company vs. Sole Trader: Which is right for you?

Congratulations! You’re ready to go solo and embark on a career that you’ve built with your own two hands. But setting up as a self employed tradesperson can feel like a daunting prospect if it’s your first time around the block. From accounts and insurance, to taxation, it can feel like there’s a whole heap of stuff you know next to nothing about. But worry not, it’s not as complicated as it seems.

One of the very first decisions you’ll need to make when you’re starting out solo in a trade is whether you want to register as a limited company or as a sole trader. This is all about choosing your businesses legal structure. The decision will affect how you handle tax, how you work with employees, how you can grow your business and any number of other factors.

The decision is not irreversible and, of course, you can switch should you need to, but it can be helpful to get off on the right foot. Here’s a quick guide to what they both mean and how to choose the right option for you.

What is a limited company?

A limited company, in a nutshell, is a organisation set up to operate your business. All of your business’s incomings, outgoings, debts, profits etc. belong to the limited company, not you personally. Once you have paid the corporation tax owed by your limited company, the company can then share its profits with its members (including shareholders and the director) as salaries, benefits, expenses, dividends and director’s loans.

For most tradespeople this legal structure is overkill. It can be complex to set up and complex to manage – especially if you do not have an accountant on hand to guide you. There are also many responsibilities on the director of the company, however, if you’re planning to grow your business quickly and want to take on staff, a limited company is often the best option. Here’s some more information on how it works.

What is a sole trader?

A sole trader, on the other hand, has fewer hurdles to jump through and far less pressure when it comes to sorting financial issues. A common misconception is that sole traders can’t employ staff – this is incorrect. A sole trader simply refers to a self-employed person who runs their own business on an individual basis.

The structures in place for sole traders are a lot less complex and rigid than for limited companies, however, in some regards there is more responsibility. For instance, any debts you accrue belong to you personally, not an external company. You’ll also need to undertake self assessment tax returns on an annual basis, pay income tax and register for VAT if you turnover more than £81,000 yearly. Learn more about being a sole trader here.

Which is right for me?

For the majority of tradespeople heading out alone, registering as a sole trader is the best option. It’s far faster to arrange (so you don’t have to worry about wasting valuable time setting up your stall) and it’s much more flexible and much less expensive. If you plan to do big, ambitious things with your business however, it’s well worthwhile sitting down with an accountant to discuss the limited company option.

Have you been through this all before? Got any advice for tradespeople just starting out along the same route? Share your experience and advice below…