Self-employed vs limited company

Should I set up as a self-employed trader or as a limited company? And if I set up as self-employed now, when or if should I move to become a limited company?

These are questions that I (and I’m sure every other accountant) has been asked a thousand times! And it’s no surprise, as there is no straightforward answer.

I know, sorry, you were hoping this blog might answer it once and for all, so spoiler alert … it doesn’t!

But let’s shed some light on some of the more significant aspects you need to consider, and hopefully, they’ll be some information here that resonates with you and helps you to draw your own conclusion based on your own personal circumstances.

Here are 5 key points and some pros and cons of each.

1. Size

There’s a perception that limited companies are bigger than self-employed traders, and often that is true (and there’s good reason for that, which we’ll come on to!) but often this perception can simply be used to the business’ advantage.

If you want to appear bigger than you are, perhaps to service larger clients that otherwise wouldn’t trade with you, then go limited. Alternatively, if you want to appear small, perhaps because you’re offering a very personal service, staying self-employed might be important.

So, if size matters, then this can be an easy decision.

2. Limited liability

As a self-employed trader, you are personally liable for your own debts, so should anything happen to your business, you need to cover the cost of any bad debts.

As a limited company, you are a separate legal entity from your business, and you become an employee of your business, which means that should anything happen to your business, and it go into liquidation the business is responsible for its own debts and it is therefore not your personal liability. Therefore, larger companies do tend to be limited, as they have larger overheads, and they benefit from the limited liability a limited company offers.

3. Taxes

As a self-employed trader, you pay income tax on your profits, in the same way that an employee pays income tax on their wages.

As a limited company, the company pays corporation tax based on its profits, and you pay income tax on your salary taken from the business (or income tax on any dividends you take from the business).

There are advantages to both, depending on your personal circumstances. An advisor would have to understand your full financial situation to be able to advise accordingly regarding taxes.

And let’s not forget national insurance. As an employee, you pay class 1 national insurance. As a self-employed trader, you pay class 2 and class 4 national insurance. As an employee of your own business, you would pay class 1, plus your limited company would pay class 1 (and class 1A on any benefits).

This is slightly more complex because you really do have to do the maths to work out which is best for you!

4. Statutory obligations and costs

A limited company must be registered at Companies House, and file statutory accounts with HMRC. If you are not qualified in how all this works then you’ll probably need advice from an accountant, which will cost you money.

As a self-employed trader, you need to complete a self-assessment tax return, but you don’t have to be registered at Companies House and your business doesn’t have to be registered with HMRC, only you do. (Unless you are VAT registered or an employer, for example, and then you do have to be registered with HMRC).

As a limited company, you will pay both personal tax (income tax) and business tax (through your business as corporation tax).

Being a limited company may seem to be slightly more complex, but in my honest opinion, whether you are a self-employed trader or have a limited company, I would suggest you should have a qualified accountant to help you with your tax duties anyway. A good accountant will save you as much as they’re costing you, so it isn’t as costly as you might expect!

5. Admin

Depending on how you run your business, how you trade can either increase or reduce your admin burden, but this does very much depend on what you do. For example, as a self-employed trader you might deem that to be easier to understand, and easier to manage yourself, and therefore reduce your time spent on the business books. You also don’t need a separate business bank account if you are self-employed (although you might still be advised to do that anyway) whereas if you set up a limited company you will need to keep all your financial affairs of the business separate from your personal financial affairs (as remember, you are a separate legal entity from your business!)

And lastly, if you start as a sole trader with a view to setting up as a limited company further down the line, you might find it better to start as a limited company at the outset. Plus, you should ensure you can protect your business name if you do want to register it later. As a self-employed trader, you can trade under any name you choose, but as a limited company you must register your business name, and business names must be unique in England. So, it might be worth registering your business name at the outset anyway, even if that limited company lies dormant for a while.

So, what should I do?

As I said, I’m not going to give you the answer today. The best advice I can give is that you seek independent professional financial advice. There are so many factors to consider (way more than the ones I’ve raised here) and it is important to understand all your personal circumstances for you to get the best advice for you.

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