- July 5, 2018
Sole Trader vs Limited Company: The Showdown
When you decide to work for yourself and go freelance, you will need to make a decision regarding how you will operate. Will you register as a sole trader or become a small limited company?
Even though you might be working on your own in a one-man team, it is still possible to register as a limited company, so you don’t need to worry about finding some last-minute employers to make it possible! But that’s not the only thing you will need to take into consideration. As with all aspects of business, operating as either a sole trader or business will come with its own set of pros and cons, and you need to weigh these all up so that you can make an informed decision.
Is this an issue that you are still scratching your head about? Here are a few things to consider when you are thinking about whether to become a sole trader or a limited company.
Becoming a Company Legally Separates You from Your Work
Once you incorporate your business and become a limited company, you will have legally separated yourself from your business. This means that the company is a completely separate legal entity from you. So, if the business ever goes into debt, you will not need to rely on your personal finance to help get you out again. That’s not the case, though, if you are a sole trader, as you and your business will be the same entity, so you might have to dip into personal savings to help your business. Similarly, if your business ever gets taken to court for whatever reason, it won’t end up on your personal record because of this legal separation.
You Will Pay Less Tax as a Limited Company
If you go through the company registration process, you won’t have to pay as much tax once you become a limited company. That’s because you will be paying corporation tax rather than income tax. This usually works out a lot more tax efficient as you won’t be taxed quite so much. Not only that, though, but you will be able to deduct a lot more expenses from your company’s income, which can help you reduce your tax bill even further.
There’s a Lot Less Paperwork If You Are a Sole Trader
So, the two main advantages that limited company owners have is that they are a separate legal entity from their company and they can pay a lot less tax. However, there is a lot of paperwork that you need to do in order to become an incorporated company in the first place. And that’s not where the paperwork ends! There will be a lot more paperwork when it is time to file your taxes each year. In fact, there is a considerable lot more to do than sole traders. So, if you don’t fancy filling out endless piles of forms and always signing documents, you might want to stick to working as a sole trader!
You’ll Look More Reputable When You’re an Incorporated Company
Some people find that their services are in demand a lot more once they become a limited company. This is largely down to the fact that you will start operating under an official business name. There are quite a few clients out there who will see your name and consider you to be a lot more reliable and reputable. That’s because you are presenting yourself as a credible organization. Plus, most clients prefer to work with limited companies because of the legal benefits that they bring.
Sole Traders Enjoy More Privacy
Once you become a limited company, all of your personal and company details will go onto a large database of companies, and this will be searchable to everyone. People will be able to find out your name, contact details, and even your home address if that is your main business address. This doesn’t happen to sole traders, though, as they benefit from a lot more privacy. Sole traders don’t have to hand over any sensitive data to this database, so they can keep more of their data secret from the public.
Incorporated Business Names Are Protected
Once you become a limited business, you will need to come up with a name for your company. Under business law, all incorporated company names are protected so no one else can use it. You won’t get this protection as a sole trader.
So, do you think you will go down the sole trader or limited company route?