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What sort of business should you be? Am I a sole trader or limited company? How do I function as an indie? How do networks and partnerships work? As an independent in the UK you have two real options. You can be self employed as a sole proprietor or sole trader. You can run your business through a limited company. So what are the advantages, disadvantages and key features of each? Sole Trader Advantages Confidentiality - virtually no information is available about you in the public domain unless you want to put it there. Freedom of manoeuvre with very little regulation. Easy to operate. Easy to start and easy to finish. You pay tax each year on your profits as you earn them. Disadvantages Unlimited liability - if anything goes wrong, apart from any insurance cover that you may have, (for public or employers liability or indemnity insurance), you are totally and personally liable for any claims that are made against you. Tax planning is difficult as you pay tax on the profits as you earn them. Higher taxes than using a limited company currently. Limited Company Advantages Easy to establish - you can buy or form a ready made limited company around £60 or less, if you shop around. Limited liability for the shareholders so most litigation should stop with the company, protecting the directors and shareholders. Tax planning can be easier. More tax efficient currently than the sole trader option. Disadvantages Some financial information needs to be on file in the public domain, principally at Companies House where abbreviated annual accounts need to be filed, together with details of the company’s Directors, Company Secretary and shareholders. Higher administrative burden than being a sole trader, but, on balance not that much worse. For example, a limited company will need to operate a PAYE scheme for just you as a director. A limited company must have at least one shareholder, together with at least one director assisted by a company secretary. If you only have one director, then this person cannot also be the company secretary. Ask your spouse or partner to be your company secretary if this is the case. Any other thoughts here? Well, if you are starting off as an independent in a small way and want to test the temperature of the water, then working as a sole trader is a cheap and inexpensive option, as you can, relatively painlessly, always convert your sole trading business to a limited company later on with very little tax downside. However, do not under estimate the importance of limited liability. Some of your clients, customers and suppliers may be vexatious litigants and using a limited company gives you a considerable element of protection from their depravations (plus a certain amount of kudos and status). To some clients you will always look more attractive as a limited company, (however small), than as a sole trader. |
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