When embarking on a business venture, one of the primary dilemmas entrepreneurs face is how to operate Self-Employed vs. Limited Company. This decision holds significant implications, and understanding the pros and cons of each option is essential for informed decision-making. In this guide, we’ll delve into the key considerations for operating as self-employed and as a limited company to help you determine the best-fit structure for your business.
Self-employed vs. limited company : Self Employed Benefits And Negatives
Self-Employed/Sole Trader Benefits
Becoming a self-employed professional presents a straightforward entry into entrepreneurship. The simplicity of notifying HMRC within the first three months of earning income sets the tone for flexible decision-making. Managing accounts is very simple and can involve nothing more than keeping track of your finances, invoices, and expenses. At the end of each financial year, you will be required to fill in a self-assessment, but this is straightforward if your accounting is kept up to date.
Operational freedom extends to financial management, allowing you to utilise your personal bank account for business transactions. Alternatively, you can set up a dedicated business account instead, which offers ease and convenience.
Self-Employed/Sole Trader Negatives
Self-employment may limit growth potential. Once your turnover passes a certain threshold, you are required to become VAT-registered, potentially prompting a shift toward becoming a limited company. Although your tax affairs will be simple, they are also more costly as you will pay personal tax at a rate in line with if you were employed. This means you are subject to the same increases in rates as your income increases. Variable income patterns and no fixed payday can also pose challenges for self-employed business owners.
Self-Employed vs. Limited Company: Limited Company Pros and Drawbacks
Pros of Forming a Limited Company
Defining yourself as a limited company immediately makes your business appear more credible and long-lasting. It suggests that you will soon be earning above the VAT threshold if you are not already. As a limited company, you can be traced by the company’s house registry and this transparency gives clients extra peace of mind. Your overall tax bill is likely to be lower as you are able to pay yourself as both an employee and as a shareholder – these are taxed differently and may even be subject
to exemptions. The prospect of a consistent regular salary income with a set amount of tax and national insurance contributions to pay is a huge benefit. You are able to leave money in the business for investment and future commitments, whilst also looking better for mortgage or loan applications. As a limited company you also have the ability to sell shares in your company to raise capital (but this does mean you are selling a % ownership of your company). In addition as a limited company, you have limited liability and are not liable for any losses arising from the business, so there is no risk of you losing your home or personal assets.
Drawbacks of Forming a Limited Company
Corporation tax obligations, presently around 19%, apply to limited companies, although they still usually result in lower overall tax burdens compared to sole traders. A number of compliance intricacies need to be taken into consideration such as filing returns, proper registration, deciding on a company secretary and directors, and registered addresses. In order to be compliant with limited company tax rules you will need to submit VAT returns, regular accounts, and an annual return. This is more complicated than a self-assessment, so you may want to employ an accountant to help with these tasks.
Making an Informed Business Structure Choice on Self-Employed vs. Limited Company
While this guide may have been helpful for considering the best business structure for you, it’s always best to consult with an experienced accountant too. Their expertise will help you to make an informed choice, taking into account your current and future business expectations.
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