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Am I better off as a sole trader or limited company?

Like 60% of businesses in the UK, I’m registered as a sole trader. Sounds rugged, doesn’t it?

Like I’m a frontierswoman in a fur-coat I’ve made myself, opening my supplies store in the snow, bartering rope and candles with pan-handing gold traders.

In fact, it is just me and my cats tapping away at the laptop all day. But I can dream.

Registering as a sole trader appealed to my sense of independence and aversion to admin. And, at the minute, it also makes sense from a tax point of view.

But did you know that, as a freelancer, you could register as a limited company instead? Not only that, but you might be better off if you do.

Before I became a freelancer or, more specifically, before I became a freelancer creating content for a small business advisory service, I held some common misconceptions about business structures.

Namely:

  • sole trader means you work alone
  • limited companies have big offices and lots of staff

I was wrong on both fronts. In fact, a sole trader can employ staff and a limited company can just be one individual. Mind. Blown. So what does that mean for your freelance business? Let me explain.

What is a sole trader?

When you register as a sole trader, you’re saying that you and your business are the same entity. The ‘sole’ part just means you’re the only owner of the business, not that you work by yourself.

You’re classed as self-employed, retain complete control over your business and get to keep all the profits.

Admin is easier because all you need to do is register and complete an annual self-assessment tax return. Happy days!

But, as a sole trader, you’re personally responsible for any legal or financial issues your business runs into. That means you have to pay back any business debts you incur.

What is a limited company?

When you register as a limited company, you’re saying that you and your business are separate entities. Instead of being self-employed, you become an employee, director and shareholder of your business.

There’s more admin and public scrutiny when you’re a limited company. You have to register with Companies House and submit your annual accounts, as well as complete an annual tax return (called a Confirmation Statement) to HMRC.

But it means that you have limited liability for any financial losses your business makes (hence the name ‘limited’).

If you go bust, you’ll only lose what you invested in the business. Creditors can’t come after you for your personal assets (unless it’s proven that you’ve been involved in dodgy dealings!)

Because you’re classed as an employee of the business, you take a wage from the business. And as a shareholder, you can also take a dividend, which attracts a lower tax rate than a salary.

Which business format is right for my freelance business?

I wish I could tell you, grasshopper. But you’re going to need to speak to an accountant for guidance on which makes more sense for your individual circumstances. My aim here is just to make you aware of your options. Here are a few things to consider.

Financially speaking

If you’re still at the startup stage, counting the pennies and chasing down leads, you’ll probably better off registering as a sole trader. But once your income starts to creep up towards £30k+, you should seek advice from an accountant.

As a sole trader:

  • you get your personal tax allowance of £12,500 per year before you have to start paying tax on your earnings
  • any earnings over this (but under £50,000) will be taxed at 20%
  • then there are two types of National Insurance contributions to consider

After all this is taken into account, our plucky sole trader earning £30,000-a-year will face deductions of £5,579.12.

As a limited company:

  • you’ll pay 19% corporation tax on all taxable profits
  • you get your personal tax allowance of £12,500 per year before you have to start paying tax on your personal earnings from the business
  • you’ll be able to take dividends from the company, which includes a small tax-free allowance

Juggle this all around and, on earnings of £30,000, you’d be better off as a limited company, with deductions of £5,222.42.

Sure, it is small potatoes at £30k. Especially after you deduct the cost of an accountant. But after this, the difference keeps increasing.

As you can tell, the UK tax system is pretty complicated. A good accountant can work through all the rules and regulations to help you go home with more money in your pocket than your sole trader equivalent.

Public perception

Beyond the numbers, there’s the question of perception. Limited companies have to register their business with Companies House, submit their accounts, make their details a matter of public knowledge.

This lends more credibility than the sometimes-tarnished reputation of the sole trader. In fact, some bigger businesses require any freelancers or contractors to be limited companies for that reason.

So whilst you might be better off as a sole trader tax-wise, the increased credibility of being a limited company might win you a big client who you’d not otherwise have won. And the earnings from that could completely outweigh the tax benefits.

Protection

Obviously, you’ll not be planning to run up any debts. But sometimes these things happen. If you’re a limited company that goes bust, you will have more protection than if you’re a sole trader.

Another advantage to registering as a limited company is protection for your business identity.  You can register your company name so that other businesses can’t use it.

Sole trader or limited company: the pros and cons

Pros of being a sole trader

  • Less admin
  • More privacy
  • Keep all of your profits after tax
  • Potentially better off financially

Cons of being a sole trader

  • Personal liability for any business losses
  • Public perception/access to opportunities

Pros of registering as a limited company

  • Limited financial liability for business losses
  • Positive perception and access to opportunities
  • Potentially better off financially
  • Protection for your business name
  • More flexibility with your personal tax

Cons of registering as a limited company

  • More admin
  • Less privacy / more public scrutiny

So, what do you think? Have you learnt something new about business structures for freelance writers? I hope so.

Go forth and be fabulous, fellow freelancers. And don’t forget to speak to a qualified accountant before making any decision about your future business format. Individual circumstances may differ (for example, married couples), so take advice before making any big decisions.

Libby Marks www.writeontyne.com and Andrea Scott https://aescott.co.uk

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