Limited Company Or Self-Employed: Which Is Right For My Business?

As you start on your own there are many things to consider. One of the important questions to really think through is whether you will operate as a self-employed sole trader or set your business up as a limited company.

Below we will highlight some of the differences between each. If you need any more guidance your accountant can guide you further.

Self-employed

Setting up as self-employed is the quickest option as it requires minimal effort as opposed to setting up as a limited company. You can do this all online and all you need to do is register for Self-Assessment. Therefore, it is the most popular option amongst new business owners in the UK. Day-to-day it is important to get into the habit of keeping accurate records of your invoices, receipts and expenses.

The advantage of being self-employed is that you can take as much money as you want from the business. However, the downfall of this is when you are self-employed you as an individual are a business. This means if the business has any debts or for any reason fails, you are personally liable.

If you are self-employed, you have until the 5 October of the following tax year to tell HMRC that you are trading. This means that if you began trading in June 2018, you have until 5 October 2019 to tell HMRC, should you want to. You will complete your self-assessment tax return and tell HMRC what profit you have made during that tax year and then you pay tax on this profit. You will need to submit a self-assessment tax return by the 31 January after the end of the tax year.

Limited company

If you decide to trade through a Limited Company, you will need to create the Limited Company before you are able to do anything. Setting up as a Limited Company is not as straightforward as registering as self-employed. Your Limited Company will need to submit its own company tax return and accounts to HMRC as well as a shorter set of accounts to Companies House within nine months of its year-end. As a Director, if your own income will give rise to a tax liability, you will need to complete a self-assessment tax return as well.

When you trade through a Limited Company, you should not mix personal expenditure with that of the company. This is because the Limited Company is a separate legal entity to yourself. As your Limited Company will have to complete its own company tax return, it should come as no surprise that it will also have its own tax liability. The Limited Company will pay corporation tax, and this will be due nine months after its financial year-end. An advantage of setting up this way, however, is that you could pay considerably less tax than you would if you were self-employed.

A Limited Company doesn’t have a personal allowance, however, so it will begin to pay tax from the moment it makes £1 in profit. But then there is your personal income that you will extract from the Limited Company in the form of a salary and dividends.

A limited company is classed as a separate legal entity to its shareholders and directors. This is the biggest difference between the two ways to set up your business and is an important note to consider. Unless any fraudulent activity takes place, you as a director will not be held personally accountable for any financial difficulties the company finds itself in. Many businesses favour this as it helps to reduce the financial risk to those individuals involved with the company.