Should I register as Self-Employed or a Limited Company?

Self-Employed vs Limited Company

Setting up a new business is an exciting period, though often we hear from business owners that they aren’t sure which structure is right for them. This guide will explain the high level advantages and disadvantages of each structure so that you can make an educated decision as to which structure suits you best.

As a self-employed individual you would be personally responsible for the businesses debts, meaning your personal assets could be at risk. Whereas operating as a limited company offers limited liability therefore reducing the risk to personal assets. This is because you and the company are seen as separate legal entities.

Generally speaking, limited companies stand to be more tax efficient than self-employed businesses, as instead of paying income tax companies pay corporation tax on their profits. Additionally, there is a wider range of allowances and tax deductible costs that a limited company can claim against its profits compared with a self-employed business.

Both self-employed individuals and directors of limited companies are required to submit a Self-Assessment to HMRC, but those operating a limited company must also submit extra paperwork to regulatory authorities (CT600, Annual Accounts to Companies House, Confirmation Statements, VAT returns if VAT registered and Payroll submissions if operating a Payroll). The administrative burden of a self-employed individual is therefore considered less than that of a limited company.

Key points to consider when determining whether to register as Self-Employed or a Limited Company?

1. Expected income and profits of the business
2. Your other earnings and personal tax position
3. The level of personal risk or financial liability you are comfortable taking
4. Brand perception and customer preferences
5. Future plans and flexibility required for the business

Deciding on the best legal structure for your business is a crucial decision and one we recommend you consider carefully, where possible taking the advice of an appropriately qualified accountant.

There are a number of advantages and disadvantages for each structure that you will need to weigh up in order to determine which business structure is best for you.

What does being self-employed or a sole trader mean?

A self-employed individual, often known as a sole trader, does not work for a specific employer who pays them a consistent salary or wage. Self-employed individuals earn an income by offering their services or products directly to customers or businesses. They are required to win work or customers themselves and take responsibility for the success or failure of the business

Sole traders often have multiple customers at one time, and are responsible for determining their own working pattern and place of work. Additionally, they are generally required to provide any tools or equipment required to complete their service or product offering.

Examples of self-employed individuals are:

1. A hairdresser or beautician that provides their services from home, is responsible for buying the products required for treatments and for marketing their services to potential customers.
2. A photographer that purchased their own photography equipment, schedules their own shoots and has multiple clients they take photos for.
3. A coach that advertises their services, pays expenses such as insurance, zoom etc. and organises their coaching sessions directly with their clients.

What does operating as a limited company mean?

Many of the indicators of a sole trader also apply to owners of a company, however, instead of being self-employed you are considered both an owner (shareholder) and employee (director) of a limited company.

A Limited Company is a general form of incorporation that limits the amount of personal liability undertaken by the company’s shareholders and directors. This means that as a director and shareholder of a Limited Company, the business and you are seen as separate legal entities, which provides a layer of protection to your personal assets.

This means, that should the company fall on hard times and be unable to pay suppliers for example you as the business owner would not be responsible for settling the company’s debts with your personal funds.

Limited companies come in all shapes and sizes, some examples are:

1. A marketing and branding company, that is owned 50/50 by 2 shareholders and directors, that employees 2 administrative staff on a casual basis and subcontracts specific client projects to self-employed individuals.
2. A graphic design company that is owned by one shareholder and director that works with multiple clients on a fixed price project basis and from time to time subcontracts work during busy periods to other designers.
3. A service provider that sells a variety of trade services to business and consumer customers

Self-employed/ sole trader vs limited company

Setting up as either structure will bring its own advantages and disadvantages, so starting with the self-employed option let’s delve into the detail.

Benefits of being Self-Employed

• Relatively straightforward and easy to set up and register HMRC, the registration is also free
• A simple way to operate your business without the administrative burden that comes with running a limited company. For example only required to file a self-assessment tax return for HMRC annually
• Offers greater privacy than that of a limited companies whose details are published at Companies House
• Broadly speaking self-employed businesses are easy to close and also simple to transition to a limited company in the future

Considerations of being Self-Employed

• Sole traders or self-employed individuals have unlimited liability, as they’re not viewed as a separate entity by UK law. This means that if the business gets into debt, the business owner is personally liable. As such, self-employed individuals could lose personal assets if things go wrong
• Raising finance can be tricky, as banks and other investors tend to prefer a limited business. This limits the expansion opportunities of sole traders or self-employed individuals
• Tax rates on self-employed individuals aren’t always as favourable as they are on limited companies. When you reach a certain level of earnings, it might not be as lucrative to stay self-employed as the tax rates are higher
• Clients or customers may see sole traders or self-employed businesses as less attractive than a limited business, this is because there is a certain prestige that comes with being limited

Benefits of being a Limited Company

• Unlike a sole trader a limited company has the benefit of limited liability, as incorporation forms a legal distinction between the business owner and their business. This means that personal assets aren’t exposed – you only stand to lose what you put into the company
• Once you’ve registered a company name nobody else can use it, in contrast to sole traders who aren’t offered the same protection, it is worth noting though that it does not give you the same protection as a trademark.
• Generally speaking, limited companies stand to be more tax efficient than self-employed businesses, as instead of paying income tax companies pay corporation tax on their profits. Directors then extract personal income from the company through a combination of relatively low salary and dividends. You could for example take a salary below the tax-free allowance, and assuming you have no other income (e.g. from another job or a rental property) it would not be subject to tax and only attract minimal national insurance contributions if any. Then you could take the remainder of your required income as dividends assuming there is adequate profit generated, which are subject to lower tax rates than income tax. Additionally, there is a wider range of allowances and tax deductible costs that a limited company can claim against its profits compared with a self-employed business
• A limited business has a certain level of prestige in terms of brand image that sole traders do not. Generally people consider a limited business as an established business, often making them appear more professional than sole-trader businesses, though in reality this may not always be the case
• Operating as a limited company can make it easier to attract clients, investors and obtain debt compared with other business structures
• As a director of a limited company, you can make company contributions to a personal pension scheme. This means the company gets the tax deductibility of the pension cost and the director doesn’t have to pay to take the money out of the company and then invest it into a pension, resulting in tax savings

Considerations of operating as a Limited Company

• Operating as a limited company brings added responsibilities. These come in the form of what’s called the Director’s Fiduciary Responsibilities, which basically outline what a limited company director must do legally. You’ll need to file a yearly annual return for one, as well annual accounts
• These added responsibilities of being a limited create a layer of cost as you will need to hire an accountant, compared with being self-employed where it is possible to do your tax return yourself (though many self-employed people opt to use an accountant due to the tax advisory element)
• It can also be more time-consuming to operate a limited company, as you’ll need to deal with this extra responsibilities and paperwork, you will also need to pay a fee to register the company
• In contrast to sole traders information on your business can be found via the company register, details on directors and your company’s earnings required to be shown publicly (though do bear in mind ‘small companies’ as defined by the Companies Act 2006 have less disclosure requirements). This sort of transparency may not appeal to all

Simple summary Self-employed vs Limited Company:

Sole trader/ Self-Employed	Limited company: you are director & shareholder
You are the business.	The business is a separate legal entity.
You are the owner.	You are a shareholder; you hold all or a proportion of the company’s share capital.
You are the manager or proprietor.	You serve the company as its officer as a director.
In the event of any legal dispute, you will be sued personally unless you have suitable insurance e.g. products and services liability, professional indemnity, employer’s liability etc.	In the event of any legal dispute, the company will be sued unless it has suitable insurance cover. It is exceptionally difficult and rare under UK law for anyone to sue a director personally for a company’s wrongdoing. It is worth noting however, that there are exceptions where the ‘corporate veil’ may be pierced and a director may be held personally accountable.
Employment status You are self-employed; you cannot be your own employee.	Employment status A director is an office holder, this does not automatically make you an employee in terms of employment law, the National Minimum Wage or for Tax Credits. For Income Tax and National Insurance purposes company officers are treated as employees.
Insolvency If the business fails you will be personally (or jointly with your partners) liable for its debts. You may go bankrupt.	Insolvency If the company fails, your liability is limited to the amount unpaid on your shares (if any) unless you have made a personal guarantee for the company’s borrowing (which is often required by banks). As a director, you can be held personally accountable if you continue trading when your company is insolvent and this causes financial loss to creditors. This could result in your personal bankruptcy.
Tax on profits You pay Class 2 & 4 National Insurance and Income Tax on the taxable profits of your business. Your profits are subject to income tax rates in the year you earned it.	Tax on profits The company pays corporation tax on its taxable profits. Company tax rates are lower than higher rates of Income Tax. Employees and officeholders are subject to PAYE and NICS on their earnings from employment and many benefits attract Income Tax too. Shareholders are subject to Income Tax on Dividends.
Accounts There is no requirement that you prepare accounts for tax purposes. You may find that it is difficult to keep on top of your business, collect debts and work out profits without keeping accounts. You may need annual accounts to complete your personal tax return which includes a balance sheet section. Your taxable profit under Self-Assessment must be prepared in accordance with Generally Accepted Accounting Practices (GAAP) for tax purposes unless you are cash accounting.	Accounts You must prepare annual accounts under the provisions of the Companies Act, these can be abbreviated for filing with Companies House. HMRC require full accounts for the CT600 which must be submitted online in iXBRL format. Accounts must be prepared in accordance with accounting standards.

Related questions

What is a shareholder?

A share is a piece of a company, each piece represents a certain percentage of the company. Anyone who owns shares in a limited company is called a ‘shareholder’. The number of shares held by each shareholder determines how much of the company they own and control.

If you intend to be the sole company owner, you will need to be the sole shareholder of the company. However, if you intend for two or more people to own the Company you will need two or more shareholders. It is very important you consider what the share ownership structure will be and what the value of the shares will be.

Take note that if you have more than one ordinary shareholder any dividends you decide to take will be split by the percentage of your shareholding, for example, if two of you both have 1 share each then any dividends paid would be split 50% each.

What is a director?

A company must have at least one director. Directors are legally responsible for running the company and making sure accounts and reports are properly prepared.

This includes:

• the confirmation statement
• the annual accounts
• any change in your company’s officers or their personal details
• a change to your company’s registered office
• allotment of shares
• registration of charges (mortgage)
• any change in your company’s people with significant control (PSC) details

You can hire other people to manage some of these things day-to-day (for example, an accountant) but you’re still legally responsible for your company’s records, accounts and performance.

When must I register as a sole trader/ self-employed person?

You must register as self-employed if you earned more than £1,000 from self-employment in a tax year. We recommend you register as soon as you have reached this limit, but the absolute latest you can register is 5^th October following the end of the tax year.

When do I need to register a limited company?

You must register a company before you start trading, as effectively if you don’t you are just operating as a sole-trader/self-employed.

Am I self-employed if I have a limited company?

As a director of a company there are specific rules that mean you are treated as an office holder by HMRC, rather than self-employed. This means any payments you receive for your role as a director must be as salary and subject to PAYE.  This does not change the fact that if you are also a shareholder you can receive dividends from the company which are taxed as investment income rather than income tax.

Does a limited company have to be VAT registered?

A limited company does not need to VAT register automatically. The same rules apply whatever your business structure, they stipulate that you must register for VAT if your VAT taxable turnover goes over £85,000 (the threshold) or you know that it will. Your VAT taxable turnover is made up of the total of everything sold that is not VAT exempt.

You must register for VAT if:

• You expect your VAT taxable turnover to be more than £85,000 in the next 30 day period
• Your business had a VAT taxable turnover of more than £85,000 over the last 12 months

You may also need to register in some other cases, depending on the kinds of goods or services you sell and where you sell them.

Book a free consultation

Ultimately which option is right for you and your business depends on a number of factors, and is often a complex decision with lots of pros and cons of either business structure. That is why we always recommend speaking to an accountant before choosing either structure. We offer a free no obligation consultation so we can discuss your specifics, give advice and you will have the opportunity to ask questions so you feel confident and comfortable with your choice.