A common question for the self-employed, this guide will give you an overview of what may be best for you.
The decision is not straight forward and has a wide array of implications for tax, legal / financial responsibilities, levels of paperwork and how many other businesses will view you. Unfortunately there is no single answer to this age-old debate, as different structures will be more suitable to different situations.
The first step is to look at how type of business is formed by the individual. Sole traders need to contact HMRC, Revenue & Customs, and register for self-assessment. At the end of the tax year, the self-assessment forms will have to be submitted to HRMC, who will tell you the amount of tax required to be paid.
The benefits are potentially lower levels of taxation, as they are based around income tax, greater flexibility for the owner alongside fewer forms and pieces of paperwork.
Limited companies are a little more complex, the owner will have to register with Companies House and receive a certificate of incorporation, legal proof the company exists, this also includes its unique company number and date of formation. There are many restrictions on company names, along with a wide range of other company specific attributes. The business section of the www.gov.uk website explains the process in far more detail, and is a great place to start.
Some individuals will choose to operate as a limited company simply because many clients and agencies will only do business with limited companies. The downsides of becoming a limited company is having to comply with more rules and regulations, higher accountancy fees and penalties for incorrect paperwork is a lot higher. A limited company will have to pay corporation tax and cannot withdraw money from the company without recording it as a salary, dividend or loan.
The decision is a difficult one; each situation will require individual assessment and there is no clear cut answer for any business. If you are thinking of starting a limited company or becoming a Sole Trader, the www.gov.uk website is a great place to start.