Ever wondered what’s the best business structure for tradespeople?
So, you want to work for yourself, but not sure whether to be a sole trader or register as a limited company? Your business structure will dictate what paperwork you’ll have to complete and how you will take profit. Use our guide to help you decide what structure works best for you and your business…
In this article we will cover:
Sole trader
This is the simplest way to set up your trade business. This is a business owned and controlled by one owner who is classed as self-employed, but you can still employ staff.
As a sole trader you’re personally responsible for running their business and for meeting the legal requirements that come with it. You pay personal income taxes on the business net profits.
If you are doing your own work – rather than working for someone else, you’re likely to be a sole trader already whether you realise it or not.
How to get started?
It’s easy! Jump in the van and start trading pretty much straight away. Just remember to:
- Register with the HMRC as soon as you start trading for self-assessment
- Keep a record (including receipts) of your incomings and outgoings
- Open a business bank account to keep personal and business expenses separate otherwise you could pay too much tax!
- Submit your tax return and pay your taxes on time1
Pros
- Profits after taxes and expenses are yours to keep. Cha-Ching!
- Working for yourself you can quickly make decisions, it’s flexible (you decide what services you offer and can change that at any point)
- It’s quick, cheap and easy to set up, and the ongoing paperwork is fairly minimal.
Cons
- If your business owes any debts, they’re your personal debts
Who is it suitable for?
Anyone who is just starting out on their own.
It’s the easiest way to get started with as little admin as possible but when you start to make more money (approximately over £30k a year) it might be more economical to switch to a limited company format to save yourself money on tax.
If you work for yourself i.e. you do a job and the customer pays you (not an employer) you are already likely to be a self-employed sole trader.
Private Limited Company (LTD)
Once incorporated (set up), a private limited company exists legally in its own right, separately to you. This means the company:
- Can be sued separately to its owner
- Has separate finances from your personal ones
- Has shares and shareholders
- Can keep any profits it makes after paying tax
How to get started
Limited companies pay an application fee and are incorporated with Companies House. You can register online. You’ll need:
- The company’s name and registered address (be sure to check existing trademarks to make sure an existing one doesn’t already exist that might affect your company)
- At least one director, likely to be you
- At least one shareholder – again probably you
- Details of the company’s shares, you guessed it…probably you, with 1 share
- Rules about how the company is run – known as ‘articles of association
Companies House has further guidance on incorporating a limited liability company. An accountant can also help you do this.
Company directors run the company on behalf of the shareholders (owners), but you can be both.
You’ll have to keep details of:
- Company and accounting records ( all money received and spent by the company)
- Property owned by the company (assets)
- Debts the company owes or is owed
- Stock the company owns at the end of the financial year
- All goods / materials bought and sold and who you bought and sold goods to and from
- Financial and accounting records and file them with Companies House
- Your taxes. You can hire a professional2 (for example, an accountant) to help with your tax. HM Revenue and Customs (HMRC) may check your records to make sure you’re paying the right amount of tax.
- PAYE, set up a PAYE system to withdraw a salary
- Money taken out of the company for dividends (money taken out of the company’s profits and paid to you as a shareholder)
Pros
- Image. This structure can also make your business look more professional.
- Tax advantages after the company is making a certain profit roughly around £30k3.
- Limited liability. A shareholder’s personal assets are protected if the company was to become insolvent (go bust), but any money invested in the company would be lost
Cons
- There is more paperwork. It’s a good idea to visit a good accountant to help you through the process and to advise you on the best way to withdraw money from your limited company.
Sole Trader vs. LTD: Which is the best option for tradespeople?
| Sole Trader | Limited Company | |
| Structure | A one-man band; you are the business, the owner, and the manager. You are considered to be ‘self-employed.’ | The business is legally separate to you, you become a shareholder (owner) and a director (employee). |
| Protection -Liability? | No separation between you and the business, if the business has a legal dispute or owes money you would be sued personally. | The company is a separate legal entity, its finances are separate to your personal finances, so your personal assets and credit rating are safe. |
| Tax on Business Profits | Sole Traders are paid like an employee so Income Tax and National Insurance on your business profits in the year that they’re earned. Have a tax-free allowance. | A limited company pays Corporation Tax on all the business profits in the year earned. No tax-free allowance. Directors of the Company will be liable for personal tax (income tax and national insurance) on any salary they pay themselves and tax on any dividends they draw. |
| Paying Yourself | Don’t receive a salary or a wage but can withdraw money from the business as a personal expense. Keep your business accounts separate to keep on top of your bookkeeping. Business profits have already been subject to Income Tax so you’ll have no further tax to pay when you withdraw money from the business. | As a director of a limited company you can decide when payments are made, which may allow you to gain a tax advantage. Money withdrawn from a limited company by payroll is subject to Income Tax and National Insurance. Paying a year-end dividend can make tax simpler than adding a Director to payroll. Dividend rates are lower than income tax. |
| Business Accounts | No requirement to prepare formal business accounts but it’s best to set up a business account to keep your personal accounts separate for tax purposes. You must complete a self-assessment tax return. | You must submit financial accounts to Companies House every year. A company tax return, along with your financial accounts must also be filed online with HMRC. |
| Privacy | There are no formal requirements to publish business information as a sole trader. | Information about your limited company, including the financial accounts will be in the public domain. Each document filed at Companies House is readily available to be downloaded by any third party. Use your accountant as your registered office address if you’re concerned about making your home address public. |
| Set up Costs | Free | It costs to incorporate your business. You can expect to see an increase in your fees of 50-100% compared to a sole trader; this is because of the extra work your accountant will need to do on your behalf. However, this cost is usually outweighed by potential tax savings. |
| Legal Responsibilities | Only those associated with running your business such as paying tax and employment obligations. | Obligations for filling documents at Companies House. Failure to meet these responsibilities can lead to disqualification, fines, or in the worst case, a criminal prosecution. |
Summary
Now you know the differences, it’s really just a personal choice!
If you just want to work for yourself and get started quickly you might want to operate as a sole trader as it’s fast, easy to get started and, other than filling your taxes, there’s little admin that’s related to it.
Aside from there being more admin, becoming a limited company can bring tax benefits, as well as limited liability, greater borrowing power and improved reputation from clients and customers.
You might start out as a sole trader then later decide to incorporate your company when you’re making a bit more money. As a rough guideline once your sole trader profits reach around £30,000 per year it might be worth incorporating the company as the tax savings outweigh the costs of running a limited company.
If you do decide to change from sole trader to limited company here are the steps you’ll have to take:
- Decide whether you’ll be the sole director or whether you want to bring in others
- Tell HMRC your legal structure has changed
- Choose a name for your limited company
- Register your business with Companies House
- Set up a new business bank account for your limited company
- Tell your insurer your legal structure has changed
- If you have employees you’ll need to take legal advice before changing the legal structure to ensure you’ve correctly consulted them
Changing from sole trader to limited company can be a tough thing to get your head around on your own, so you may find it’s worthwhile chatting it through with an accountant.
However, you decide to do it good luck with your new venture. We really hope it takes off!
Questions
Register with HMRC for self-assessment, keep a record and receipts of your incomings and outgoings; open a business bank account to keep personal and business expenses separate otherwise you could pay too much tax! Submit your tax return and pay your taxes on time.
There’s less admin with being a sole trader and if you’re earning under £30k as there are no real tax advantages. But if you want commercial work and limited liability then register your company from the start.
That depends on your business. It’s easier to get started as self-employed then register the company later on.
It gives your company a professional image; there are some tax advantages plus you are legally separate to the company. So if the company has any legal or financial issues, they are not yours personally.
A sole trader is someone who works for himself. There’s no difference between the company and the owner. In a limited company the owner is often a director (employee) and a shareholder (owner) of the company. The company is a separate legal being.
It costs £12 to register a company via Companies House but there are accountants and online companies who will do it for you and change you for their time on top.
You can do it yourself on Companies House here or pay someone else to do it.
Becoming a limited company can bring increased tax-efficiency, as well as limited liability, greater borrowing power, improved reputation, and credibility among clients and customers.
Keep your existing business set-up and clients and continue trading as normal, but you will need to change the legal structure of your business by registering as a company, an accountant can help with this. Be sure to tell HMRC and your insurers that your legal structure has changed and take legal advice about consulting your staff well before the change to avoid employment issues.
As a sole trader you pay tax personally on all the profit you make. It’s generally understood that if you earn up to £30,000, you’re better off staying as a sole trader. When you start to take in more than that annually, it’s probably time to think about whether to incorporate.
If you’re a limited company, you pay Corporation Tax on any profits you make (and you need to do this before you take any dividends). Claiming expenses reduces the profit you make and, therefore, your tax bill. Your personal tax is based only on the salary and dividends you draw from your company. You can claim tax relief on business expenses that you couldn’t as a sole trader.
There is a misconception that you can’t employ staff as a self-employed sole trader but you can!
Yes of course.
There’ll be issues with PAYE, National Insurance and tax, which HMRC need to advise you on. You’ll also need to create new employment contracts between the employees and the limited company. Get a solicitor to assist you. More information about employees and HMRC is available here.
