Sole trader or Limited Company?

Question

I'm looking at getting back into freelance graphic design (after a 2 year break staying at home with the children). I would probably only work 10hrs a week and not earn more than £10K per annum. This would be my only source of income as my family is supported by my husband.

I'm also studying Natural skincare formulating and am looking to do something along those lines later down the track, it might be running my own skincare workshops and designing and selling my own products. Is it possible to do both these things under one business? I was hoping the freelance would fund the other side of the business, pay for skincare ingredients etc. I would be using my design skills to get the latter side of the business up and running, but can this be justified as one trade?

Because of earning such a low amount and I'm wanting to do different things under one business name, what is the best way to go? Sole trader or limited company?

Answer 1

From your explanation the Sole Trader option is more appropriate and certainly easier to manage. There are many differences but the pertinent and most important ones are as follows.

The main difference in your case would be tax and administration. As a sole trader you would need to do a tax return once a year and if you earned less than £11.5k you wouldn't have to pay any UK tax, assuming you have no other income and are a "standard" tax payer. The current tax allowance is £11.5k although this can change.

Submitting your own tax return is relatively straighforward although you may want to consult an accountant. It is generally easier to run as sole trader versus a Limited Company, ie less paperwork and beaureaucracy.

If you go down the Limited Company route, the company would be liable to pay Corporation Tax on any profits and this process is more complicated and you would probably need an accountant to do that for you, which is likely to cost a few hundred pounds every year. You can do it yourself but the process is not as simple as doing your own income tax return.

Also as a sole trader you can do what you like with any income, you can spend it and treat it as your own wages. You can't do that if you set up a Limited Company as the income is "owned" by the company and so you would need to in effect pay yourself a wage from the company. In other words it's more complex than if you are a sole trader.

The main advantage to a Limited Company is that it is easier to sell the business if you want to at a later date. There is nothing stopping you setting up a Limited Company later on, after beign a sole trader if you want to. They can also be more tax-efficient but this would not be relevant to your case if you are earning relatively small sums, if your income increases then you may want to reconsider.

You can see more information here: https://www.duport.co.uk/company-formation/sole-trader-vs-limited-company.php

(I have been both a sole trader and also set up my own Limited Company)

Answer 2

You probably know that the answer is, "it depends". If this is truly a pin money type of operation, then perhaps sole trader is for you. I incline to using a limited company for two reasons, one optimistic and one pessimistic. You are looking at a business to make some money with your talents. If your business takes off, it's much easier to expand a LTD than a sole trader. Getting credit, dealing with suppliers, hiring people, all much easier. And if things go well, you will be expanding.

The negative reason is that as a sole trader (you) have unlimited liability for the debts of your enterprise. If you get sued, say your skincare line makes someone's face into a rash, you are on the hook for the whole amount. You don't want to torpedo your family if it goes bad. Being a limited company protects you from that. I can tell you that the overhead of running a small LTD is pretty light so long as you are meticulous about your record keeping. I had an LTD with two toddlers under my feet and it was perfectly doable to handle the paperwork.