I am going to be staring freelancing. Is it better if i set up as a Sole Trader or Limited Company? I wont have many expenses.
As I understand it (please correct me if i'm wrong, i've looked at this before and i've been a sole trader briefly but I've never formed a LTD company) there are pros and cons to forming a limited company.
- The tax situation is more flexible. As a sole trader all profits are considered income and subject to income tax and class 4 NI. With a LTD company there is a distinction between money paid out in salary, profits paid out as dividends and profits retained in the buisness. This can sometimes reduce your total tax outlay if you think about how you move the money arround and especially if you want to reinvest your profits in growing the buisness rather than taking them as personal income.
- you have some shielding (though not total protection). from liabilities run up by the company if it goes bankrupt.
- You have the structure in place to sell parts of your buisness to other investors.
- Some companies dislike dealing with sole traders because they can get into trouble if a self employed contractor starts acting like an employee.
- More paperwork, you have to keep track of the companies money seperate from your own. You should also generally pay yourself at least some of your income as salary which means dealing with the employer side of PAYE and possiblly with workplace pensions.
- Self employed class 4 NI is lower than the NI (employees and employers) paid for an employee. (It's also lower than corporation tax but dividends attract a reduced level of income tax which offsets this). So if you aren't careful about managing your money you may end up paying more tax as a LTD company.
Sole trader If you start working for yourself, you’re classed as a self-employed sole trader - even if you’ve not yet told HM Revenue and Customs (HMRC).
As a sole trader, you run your own business as an individual. You can keep all your business’s profits after you’ve paid tax on them. You can employ staff. ‘Sole trader’ means you’re responsible for the business, not that you have to work alone.You’re personally responsible for any losses your business makes.
Tax responsibilities You must:
- send a Self Assessment tax return every year
- pay Income Tax on the profits your business makes
- pay National Insurance
You’re personally responsible for any losses your business makes.
This is one condition which you would need to have a look. If you do some shoddy work and your client wants to recover the losses they can come after your personal money or property. LLPs have the same probelm too. And you pay NI and income tax on all of your profits.
If you have a partner then both can take out the profits of a limited company, if both are directors. The tax hit will be less as compared to a single person.