If you’ve decided to take the leap into self-employment but are still a bit confused about how to pay your taxes, then this blog is for you. We will look at the differences between a limited company and a sole trader so that you can pick the right option for your new endeavor.

What is the difference?

To put it simply, a sole trader means that you are trading as an individual, whereas a limited company is trading as the company, even if the company only has one employee.

The advantages of being a sole trader are that it is much simpler to register, free to set up, cheaper to run, and it involves fewer administrative tasks, especially when it comes to tax time. While a limited company may be more complicated and expensive to run, there are more significant tax benefits in the long run, and it also means that your personal assets are separate from your company assets, which is important to protect your home, car, or personal belongings should anything go wrong. Another benefit of limited companies is that they can provide a form of legitimacy, and for this reason, some companies only choose to work with freelancers who practice under a limited company.

Now that we know the difference between the two, to help you decide which is right for you, we will do a deep dive into how each one is run.

How to become a sole trader

Simple to set up, cheap, and easy to run, being a sole trader is the easiest way to begin your journey as a freelancer. The downside is that you are personally responsible for any losses your business makes; however, if you are a copywriter or graphic designer working on a few projects other than your laptop and the odd train ride, you are unlikely to have significant expenses.

To register as a sole trader, you need to contact HMRC. The registration process itself is pretty straightforward; all you have to do is fill out a form and wait 10 days for your UTR (Unique tax reference number). Sole traders need to submit one tax return a year, which means that you need to keep track of your income and expenses; it is important to keep thorough bookkeeping records, as it will make either your life or your accountant’s life much easier when it comes to tax time.

How to be a limited company

Along with looking more professional and protecting your personal assets, a limited company can give you the potential to expand your venture and employ additional staff. While setting up and running a limited company does cost more than being a sole trader, generally, the tax benefits you will get from being a limited company will outweigh the accountancy costs.

Unlike a sole trader, registration a limited company is done through Companies House, and while you can do it yourself as the process is slightly more complicated, it is advised to get an accountant to do it to make sure it is all set up correctly. The registration process includes picking a name, checking in is not conflicting with another company, and, if required, registering a trademark; you will also need to have a registered business address in the UK.

The administration side of being a limited company is where it gets complicated, not only do you need to register and regularly update HMRC about taxes such as Corporation Tax, but you also need to advise Companies House of any changes to your business through an annual confirmation statement and filing accounts with them and HMRC on a yearly basis. A limited company also requires you to have a company bank account to pay out a salary or dividend instead of just taking money out when you need it, as you would do a sole trader. As you are paying with a separate company bank account, keeping track of records will be easier; however, you will need to file reports and pay taxes regularly throughout the year.

If you are still unsure whether to be a sole trader or limited company, it is probably worth consulting with us here at Shoebox Accountancy. We can help you crunch the numbers while looking at your long-term goals so that you pick the right solution for your unique situation.