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Are you trying to decide between setting up as a UK Limited company, or as a sole trader? The decision is an important one – it will have a big impact on how you conduct your business, how you need to set ourself up and on your earnings.

In this blog article, RHJ Law – part of RHJ Group explore the pros and cons of each option so that you can decide which is the right choice for you. They take a look at the legal implications, tax liabilities, and other aspects of both a Limited company and being a sole trader, so you can make an informed decision.

Should you setup as a Limited company or a sole trader? Make the right choice for you

What is a Limited company and how does it differ from being a sole trader?

Before we dive into the pros and cons of each business structure, it’s important to understand the basics between a Limited company and a sole trader.

A Limited company is a separate legal entity from its owners. It’s a business structure that is set up to protect its owners (shareholders) from personal liability. In a Limited company, profits are distributed among shareholders in the form of dividends. It also has its own legal identity, meaning it can enter into contracts, borrow money, and own assets.

Being a sole trader, on the other hand, is a business structure where an individual works for themselves and provides services to clients.

As a sole trader, you are self-employed and the income you earn is taxed as personal income. You are not separate from your business, and there is no distinction between your personal assets and those of your business.

The key difference between the two business structures is the level of liability.

As a sole trader, you are personally responsible for any debts and legal issues that may arise from your work. With a Limited company, the company itself is responsible for any debts or legal issues.

Now that we understand the basics of each structure, let’s dive into the pros and cons of each, so you can make an informed decision on which structure is right for you.


Pros and cons of setting up as a Limited company

Setting up a Limited company has its benefits, but also comes with its own set of challenges. Here are some of the pros and cons of this structure:

Limited liability

One of the biggest advantages of setting up a Limited company is that the liability of the company’s directors is limited. This means that the personal assets of the directors are protected in the event that the company faces financial difficulties or goes bankrupt.

Increased credibility

Operating as a Limited company can help to give your business a more professional image and increase its credibility. It can also make it easier to secure funding or attract investors.

Tax benefits

Limited companies often have lower tax rates than self-employed freelancers. The company can also claim tax-deductible expenses, such as equipment or travel costs, which can help to reduce the tax bill.

Better pension options

Limited company directors have access to a wider range of pension options than freelancers. They can choose from both personal and company pension schemes.

Increased administrative responsibilities

As a Limited company director, you will have to comply with various legal and administrative requirements. This includes keeping accurate financial records, submitting annual accounts, and filing tax returns.

Higher setup costs

Setting up a Limited company involves higher costs than freelancing. This includes registering the company, purchasing company insurance, and paying for professional advice.

More complicated tax and accounting requirements

Limited companies have more complex tax and accounting requirements than freelancers. You may need to hire an accountant or tax advisor to ensure compliance.

Less privacy

Limited companies are required to make certain information, such as company accounts and details of directors, publicly available. This means that your personal information may be more easily accessible.

Overall, setting up a Limited company can offer a number of advantages, particularly in terms of limited liability and tax benefits. However, it’s important to consider the additional administrative responsibilities and costs that come with this structure.


Pros and cons of becoming a sole trader

Working as a sole trader, or freelancer, has become an increasingly popular choice for individuals wanting to work for themselves. But is it the right choice for you? Let’s take a look at some of the pros and cons.

  1. Flexibility: One of the biggest advantages of freelancing is the ability to set your own hours and work from anywhere. You can choose to work as much or as little as you like, and can fit your work around other commitments such as family or hobbies.
  2. Independence: Freelancers are their own bosses. They can choose the clients they work with, the projects they take on, and how they manage their work. This independence can be very rewarding and allows you to truly own your work.
  3. Variety: As a freelancer, you have the opportunity to work on a range of projects and with different clients. This can help to keep your work interesting and varied, and can help to build your portfolio and experience.
  4. Uncertainty: Freelancing can be unpredictable, with income and workloads varying from month to month. You need to be prepared for times when work is scarce, and to manage your finances carefully.
  5. Responsibility: As a freelancer, you are responsible for everything from finding clients and managing your workload, to invoicing and paying taxes. This can be daunting for some people, and may require skills and knowledge that you do not currently have.
  6. Isolation: Freelancers often work alone, which can be isolating and lead to feelings of loneliness. This can be particularly difficult if you are used to working in a team or office environment.

In summary, freelancing can offer a great deal of flexibility and independence, but it is not without its challenges. Before deciding to freelance, you need to carefully consider whether you have the skills and mindset to succeed, and whether the lifestyle is right for you.


Factors to consider when choosing between a Limited company and a sole trader

  1. Control and Flexibility: As a freelancer, you have complete control over your work and the clients you work with. You can choose when and where to work, set your own rates, and enjoy a greater degree of flexibility. On the other hand, setting up a Limited company gives you more control over the direction and growth of your business. You can hire employees, expand your operations, and take advantage of tax deductions.
  2. Legal Liability – As a freelancer, you are personally responsible for any legal or financial issues that arise in the course of your work. If a client sues you or if you cannot pay your debts, your personal assets may be at risk. By contrast, a Limited company offers limited liability protection. Your personal assets are generally safe from legal claims and creditors.
  3. Income and Taxes – Freelancers typically have lower overhead costs and may enjoy a higher take-home pay. However, they are also responsible for paying their own taxes and expenses. Setting up a Limited company can provide tax advantages and better financial planning, as you can reinvest profits and take advantage of corporate tax rates.
  4. Professional Reputation – Freelancers rely heavily on word-of-mouth recommendations and referrals for their business. As a Limited company, you may enjoy greater professional recognition and credibility, as clients often view companies as more established and trustworthy.
  5. Administrative Burden – Freelancers generally have less paperwork and administrative tasks, as they are responsible for their own accounting and record-keeping. Limited companies have more formal requirements, such as maintaining annual financial statements, filing tax returns, and submitting company accounts to Companies House.

When choosing between registering a Limited business, or setting up as a sole trader, it is important to consider your personal and professional goals, financial situation, and level of risk tolerance. It’s recommended to consult with a professional accountant or business advisor to determine which structure is best for your unique circumstances.

Need some more help speak to our UK experts

Legal and tax implications for both structures

One of the most important factors to consider when deciding between a Limited company and freelancing is the legal and tax implications of each structure.

As a Limited company, you will be considered a separate legal entity from yourself. This means that your personal assets will be protected in the event of business liabilities or debts. However, there are also certain legal requirements that come with running a Limited company. You will need to register your business with Companies House, have a registered office, and file annual accounts and tax returns.

In terms of tax implications, Limited companies are

subject to corporation tax, which is currently on a sliding scale between 19% and 26% depending on how much the business earns. However, there may be opportunities to reduce your overall tax bill by taking advantage of tax allowances and deductions.

On the other hand, freelancers are typically considered self-employed. This means that you will not have the same legal protections as a Limited company, but you will also have more flexibility and fewer legal requirements. You will still need to register for self-assessment tax returns and pay income tax on your earnings.

Freelancers may also be able to take advantage of certain tax allowances and deductions, such as the flat rate VAT scheme or claiming expenses related to your business.

Need help figuring out which is more efficient for you?

How to set up a Ltd company or register as a freelancer

Once you have decided whether to setup as a Limited company or as a sole trader, you will need to take the necessary steps to establish your business. Here is a brief guide on how to set up a Ltd company or register as a freelancer.

Setting up a Limited company:

  1. Choose a company name and check that it is available
  2. Decide on the company structure and appoint company directors
  3. Register your company with Companies House
  4. Register for Corporation Tax
  5. Set up a business bank account and keep accurate records
  6. Register for VAT if applicable
  7. Register for PAYE if you plan to hire employees
Get setup for a Ltd company

Registering as a freelancer:

  1. Decide on a name for your business and check that it is available
  2. Register for self-assessment with HM Revenue & Customs
  3. Decide on a legal structure – you can operate as a sole trader or as a limited liability partnership (LLP)
  4. Keep accurate records of your income and expenses
  5. Register for VAT if your income exceeds the VAT threshold
  6. Consider taking out insurance to protect your business
  7. Register for any necessary licenses or permits for your business
Get setup as a freelancer

In both cases, it’s important to seek professional advice from an accountant or business advisor to ensure that you are complying with all legal and tax requirements.Taking the time to set up your business properly will give you a strong foundation for growth and success in the future.


Speak to an expert

In summary, the decision between setting up a Limited company or freelancing ultimately comes down to your personal circumstances and business goals. Both structures have their advantages and disadvantages, so it’s important to weigh them up carefully.

If you’re looking for greater control and flexibility over your business, then freelancing may be the better choice for you. However, if you’re planning on expanding your business in the future or working with larger clients, then setting up a Limited company could provide greater credibility and financial security.
Regardless of which structure you choose, it’s important to ensure you understand the legal and tax implications of your decision. Seek professional advice if needed, and make sure you register your business with the relevant authorities.

In the end, the success of your business will depend on a variety of factors beyond its legal structure. Such as your skills, experience, and determination. So, go forth and start your entrepreneurial journey with confidence, knowing that you’ve made the right decision for your business.

Speak to the team to find out what is right for you

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