For those new to the world of business, there are many things to consider. One of the biggest decisions you’ll have to make when you’re starting a business is whether to set up as a sole trader (self employed) or limited company.
Both sole traders and limited companies have their distinct advantages and disadvantages (make sure you read our guide on 10 Advantages of running your business as a limited company instead of being self-employed to learn the main benefits of the limited company option).
Whilst the professionalism and protection that comes with running a limited company is appealing to many, becoming self-employed is the more straightforward option, and with it comes a number of other benefits.
So to help you make the right choice when deciding whether you should go self employed or set up a limited company when launching your new business, here are 7 key benefits of working as a sole trader;
1. Simple set-up and administration
One of the biggest advantages of running your business as a sole trader is how simple it is to start and run.
A limited company, and its directors, have more legal responsibilities and duties than someone who is operating their business as a sole trader.
When you start your business as a sole trader, you’re in full control. That means you won’t have to worry about some of the regulations limited companies have to comply with, such as:
- Filing documents when a new Director is appointed or dismissed
- Holding an AGM and keeping meeting minutes
- Having a registered office displayed
- Opening certain records to public inspection
- Completing a Corporation Tax Return and paying Corporation Tax
- Filing an annual Confirmation Statement & PSC Register
- Complying with all requirements of the Companies Act.
Aside from being VAT compliant, and deducting and paying to HMRC PAYE/NI if you have employees, the main filing requirement for a Sole Trader currently is to complete and file an annual Self Assessment Tax Return with HMRC.
2. Initial steps
When someone wants to develop a business or business idea in their spare time, trying to do this by setting up a limited company is cumbersome. It can also alert others, including your current employer, that you may not be totally committed to your career.
Certain businesses lend themselves to being sampled part-time before fully committing:
- e-commerce portals can be built, tested, and operated outside of regular office hours
- A sizable number of craft fairs and food markets take place at weekends
- Landscaping jobs can be taken on at the weekend
- Ideas can be tested with a pop-up shop
Starting off as a sole trader is less complicated than forming a limited company from the outset for businesses that are being run part-time.
3. More flexible payment options & earnings
Sole Traders can simply take money out of the business as and when it’s needed. These ‘drawings’ will be treated as a salary on the Self Assessment Tax Return.
The reason for this is that there is no legal difference between the owner and the business when you are a Sole Trader. This makes things much simpler than when you are the Director of a limited company.
Of course, caution must be exercised to ensure that funds are available to pay whatever tax is due when the Self Assessment form is submitted.
In addition, it’s advised that formal advice is taken at least initially from a registered accountant to understand the cash flow and tax variables.
4. Greater privacy
The over-riding advantage of being a limited company is that company owners and assets are considered separate to the owner’s privately owned assets. The owners (shareholders) of a limited company, therefore, can only lose a maximum of their investment in the business should things go wrong.
However, trade creditors, commercial landlords, and lenders need some indication that there is enough capital in the company to absorb losses and meet commitments to them.
They may also want to gauge if the company directors are trustworthy. That is why certain information pertaining to the limited company has to be made publicly available.
Being a sole trader is different. As a sole trader, all the details of your business are kept private. So if you value your anonymity, then the self employed route is the option for you.
Sole Traders will, in most circumstances, use the services of an Accountant to prepare annual accounts in order to calculate a taxable profit or loss. This figure is then included on the annual Self Assessment Tax Return, but this information is not publicly disclosed.
5. Insurance to cover personal assets
There are many insurance policies that will cover the ‘unlimited liability’ risks for business owners. Insurance companies who specialise in business risks such as Professional Indemnity Insurance and Director’s Insurance should be able to provide you with cover as a sole trader that would bring your risk status in line with business owners who have limited liability.
An additional consideration is long term illness cover. You must consider what would happen to your business interests should you become too unwell to run the business, and insurance cover can be put in place to protect against such eventuality.
6. Trading losses could cut personal tax bill
It’s highly likely that a new business will battle to make profits. A business owner might have a healthily capitalised start-up and have little or no living expenses but this is rarely the case.
Should business losses be incurred, there are options for a sole trader to set these against other income streams (current, past, or future), using those losses to reduce the amount of tax they pay.
For some new business owners, this ability to offset business losses could save a significant amount of tax. This is an area where specific professional advice should be sought.
7. Easier to close down the business
Where a limited company will need to get officially de-registered from Companies House, have resignations from all directors, and a shareholder willing to take assets owned by the company, a sole trader doesn’t have to worry about any of this.
Winding down and closing your business as a sole trader is a relatively simple affair. A sole trader business can be wound down by settling any liabilities, collecting monies due, keeping or selling any physical or proprietary assets, and distributing any residual monies to the owner. And finally notifying HMRC.
There are specifics to be considered if the business does not have sufficient money to satisfy debts, though, so if this is the case, seeking consultation from a Debt Advice Charity is advisable
Whether it is better to work as a sole trader or set up a limited company comes down to your own personal situation and which of the various advantages and disadvantages these two different business structures offer are more important to you.
It is well worth discussing your own personal circumstances with your accountant who can then help you to make the right decision on whether to run your new business as a sole trader or form a limited company. These guides will also help you;
- 10 Advantages of running your business as a limited company instead of being self-employed
- Responsibilities and duties of a limited company director
- 5 things you must do when you go self employed
- 15 Questions to ask when hiring an accountant for your small business
This advice has been provided exclusively for ByteStart by Tuchbands, North London’s premier chartered accountants and tax advisors. If you are looking for help or advice on anything tax or accounts-based, you can call them on 020 8458 8727 for a friendly chat.
Last updated - 6th June, 2019