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Starting out as a Sole Trader or Limited Company?

In today’s ever-changing economic climate, the numbers of people becoming self-employed are on the increase. For some it is because they are attracted to the freedom and choice that being one’s own boss brings, whereas for others, finding long-term employment is becoming more difficult as companies are offering fewer permanent positions, so working as a contractor or freelance becomes a matter of necessity.

In either case, one of the first things to consider when starting out on a self-employed basis is the type of business you will trade as. This mainly defines the legal structure and standing of your company and the way in which you pay tax. The two most popular (though not only) choices are to become a sole trader or a limited company, so let’s take a look at each of these in turn.

Sole Trader

Setting up as a sole trader is relatively simple and means that you alone own your business and have full legal control over how it is run. You can employ others to work for you, but any profits the business makes remain yours, as does liability for any losses and it is your responsibility to pay any tax the business incurs. In effect, “you”become a business and there is little distinction between the two. Read here for more information on what is a sole trader.

Limited Company

A limited company, in contrast, is responsible in its own right for the company’s profits, losses and responsibilities, and is a separate legal entity and structure. It is owned by members or shareholders (either individuals or organisations) and run by directors. A limited company must pay corporation tax and any profits are shared amongst shareholders, as is the burden of any losses the company may sustain. In this way the company is separate from “you”and your personal finances.

How do I set up?

As a sole trader you will need to:

  • register for self-assessment with HMRC
  • have a National Insurance number for payment of NICs
  • look into VAT if your turnover is likely to exceed the threshold
  • choose a business name or trade under your own name

As a limited company you will need to:

  • register or “incorporate”your company with Companies House
  • register for corporation tax with HMRC
  • have a registered office within the UK. This must be at an actual, physical address. A PO Box can be used but must have a full postal address with it i.e. street, town, postcode as well as the PO Box number.
  • appoint directors to run the company, at least one of whom must be resident in the UK
  • put in place a set of rules for running the company. These are called “articles of association”and there are standard models available which are legally accepted.

It is vital to take both financial and legal advice when starting out as either a sole trader or a limited company, in order to find out which may be the most suitable legal structure for your particular company. Both have benefits as well as risks to consider carefully, and it is possible to change from one to the other as your business progresses and evolves in the future.