Limited Company or Sole Trader?

First let’s talk about what being a limited company really means. Limited in this instance is actually short hand for “Limited Liability”, which refers to the extent that the owner or owners are responsible for the company’s debts. If the company is Limited, it is considered a separate legal entity to the owners for the sake of financial losses and debts, and so any debts that need paying cannot exceed the capital invested into the company. This means the personal finances of the owner(s) are protected.

Whilst insurance is there to cover instances where the business is at fault, and might have some financial liability as a result, there are usually exclusions in an insurance policy, and so occasions when the insurance won’t cover those liabilities. So, having that extra layer of limited liability may well be worth having as these liabilities would fall on the business and not you. This works especially well for businesses where there may be an element of risk involved in the business activity.

Having a limited company can potentially save you money over being a sole trader. Having a limited company gives you more control over how you pay yourself, and how much you pay in taxes. Owners of limited companies often choose to pay themselves through a combination of Salary and Dividends. Dividends have a lower tax threshold and so by doing this you can end up with more money for both yourself and the business, all without doing anything underhanded or potentially illegal.

Have a limited company does also have its drawbacks. Firstly, all these changes in taxation don’t come without their fair share of paperwork to keep track of. Annual accounts for the company are more laborious than for someone who is self-employed. Corporation tax returns must be prepared, as well as your own personal self-assessment tax return. All meaning more work for your accountant which means typically higher fees for a limited company compared to being self-employed

Companies House will require you to have some parts of your accounts and company details published on their site, this may not bother some but if you are someone who values the privacy for themselves or their business’ affairs then this could be something you want to avoid.

With the company being its own entity, the directors have certain fiduciary duties and must act in the company’s best interest. This can result in less control than being self-employed.