Arguably one of the most asked questions by our customers is what is the better approach to structuring your business, Self-Employed or Limited Company?
There is no straight forward answer to this question as it is very dependant on your personal circumstances. However this article will cover aspects of tax, accounting processes and privacy to help you decide whether to be self-employed or have a Limited Company.
Self Employed or Limited Company; Which is the best business structure for you?
Self-employed/Sole Trader
A sole trader is an independent contractor who manages their own business. After paying taxes on them, you are allowed to keep all of your company’s profits. Any losses that your company incurs however are your sole responsibility.
When you are self employed you work for yourself rather than an employer, which means you have freedom over when you work and the hours you choose. You also have the choice to work for more than one business at once or take on more than one client at any one time.
Advantages of Self-employed
Privacy
When you are a sole trader your personal information remains private. Limited Companies are required to be open and disclose specific information to the public, such as disclosing owners and directors on public records at companies House and publishing yearly reports. If you prefer to keep your details private, you may want to avoid setting up a limited company.
Admin
A personal Self Assessment must be submitted to HMRC by both sole traders and directors of limited businesses. However, people running a limited company must also submit additional documentation to regulatory agencies (Corporation Tax, Annual Accounts, and VAT reports if VAT registered). Failing to submit forms leads to hefty fines and penalties. Where as being self employed you will avoid these types of paperwork.
Accounting
For sole traders the accounting process is significantly easier because there is less paperwork, less expenses to track, and usually fewer clients. It is also worth highlighting that the cost of an accountant is likely to be cheaper if your self employed than it is for a limited company for the reasons I have already mentioned.
Limited Company
Even if you run a one-person firm, you can create a limited company as a separate legal entity to manage your operations. You are accountable for any financial and legal choices that the company takes in your capacity as a director. However, your personal finances are entirely independent from the company’s assets and obligations.
Advantages of a limited company
Greater Profitability
You pay Corporation Tax on your business income when you operate as a limited company, and you can pay yourself through a combination of dividends and salary (often set at the primary National Insurance threshold). Your PAYE (tax you pay on your wages throughout the year) and NIC expenses will be reduced as a result. Any additional payments you make to yourself will often be treated as dividends, which will result in a smaller tax bill if you pay the basic rate.
Additionally, you may often deduct more business expenditures through a limited company than you would as a single proprietor, including things like mileage allowance, business travels, staff mobile phones, and meals purchased while travelling for work.
You won’t be taxed on any money you declare as an expense since it will be subtracted from your company’s earnings.
Limited liability
Your personal assets are safeguarded since the Limited Company is a different legal entity. Your personal assets cannot be seized from you in the event that your business must be liquidated or runs into financial difficulties in order to settle obligations.
Enhanced credibility and reputation
Certain companies large and small prefer to engage only with limited companies, while others outright reject doing business with people if they don’t have a limited company. Therefore, establishing a limited liability company might open up new business options that previously would not have been available.
Access to credit
When you are self employed, you depend on your own credit score to borrow money for business expansion. A limited company has the ability to create its own credit rating, which may be used to support borrowing for business investment. For people whose credit ratings aren’t the best, this is excellent news.
Self Employed or Limited Company; Conclusions
Liability can be a major consideration when deciding which is better, self employment or a limited company. As we have already discussed a Limited Company is legally a separate entity to you personally, whereas if you are self employed you can be personally liable if things go wrong. An example of this is if you are unable to pay of debts, a limited company can be closed and you are not liable for the debt personally. Conversely, debt associated with your self employment business will mean you are liable for this personally.
If you are new to owning your own business being self-employed offers a simpler way of getting started and requires less administration. As I have already mentioned, running a limited company requires you to submit documentation each year to HMRC, which is comparatively more than someone who is self-employed. If the thought of managing paperwork on top of a busy workload then self employment route may be a good option. Of course you can instruct an accountant from Ugo Tax to manage the administration side of your business.
I have mentioned previously about the impact a poor credit score can have if you are looking to apply for a loan. The benefits to operating a Limited Company is that you can apply for credit through your business to support the growth of your business. This also ties into what was discussed above about liability.
If you take a loan out through your limited company and the business fails, the debt sits with your company and not with you personally. Whereas someone who is self employed that takes out a loan to develop the business, they may be personally liable if things go wrong.
It is advisable to think about who your customer base is, what sort of companies you will be invoicing, and interacting with. A person that offers massages for people in their spare time may benefit from being self employed since the costs of setting up are low and the client base may not be to concerned if they are self employed or a limited company.
If you plan to work for Amazon Flex as a delivery driver (or any delivery firm) in your spare time then being self employed would be a good option. You may like to read this article which shows 16 Expenses Delivery Drivers Claim on a Tax Return. If you decide that you want to be a full time delivery driver there may be a benefit to changing from being self employed to a limited company, which insures you maximise your tax relief.
However, if you plan on setting up a marketing agency and your customer base is mostly businesses, having a Limited company will appear more professional when interacting in meetings or invoicing for your services.
If after reading this article your still unsure if you should be self-employed or have a Limited Company I suggest you speak to an expert at Ugo Tax.
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