Sole Trader v Limited Company
As a contractor or freelancer the two most popular ways to set yourself up as self-employed are as a sole trader or through a limited company. Both are recognised legal entities and come with pro's and cons.
As a sole trader its the simplest way to trade, your business and personal tax is straight forward and it is easy to open and close your business. As a rule of thumb if you are earning less then £25,000 per year you should seriously consider this option. However there are few tax planning opportunities, its difficult to raise finance and potentially you have more personal risk - even your home could be used to pay your company debts.
One of the major reasons for setting up a limited company by contractors is simple... their clients will only work with limited companies. Other benefits of being limited include better protection if things go wrong and there are more opportunities to legally minimise your tax.
Being limited can make you look more professional and credible, also your company name is legally protected. Its easier for a company to find funding than a sole trader. There can be tax advantages for the company to fund employees' executive pensions. A limited company can sell shares in the company, so if a shareholder wishes to retire or sell their share holding, being a limited company makes things easier. With a limited company there is of course more paperwork and regulation... but your accountant can help you with this.
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Remember tax is complicated and every person has a unique set of circumstances, so we recommend you speak to a professional accountant (even if it is not us) before deciding which business structure is best for you.(Updated: 12 Apr 2017)