You’ve got the business idea, you’ve done the market research but one question keeps going around in your head. It’s the one question that is causing you to delay all the progress that you should be making… Self-employed vs limited company?
Let’s break it down and find out which option is better for you!
Full disclosure, I am based in the United Kingdom so if you live outside of the UK some of the information in this post may differ slightly where you live.
Self Employed vs Limited Company?
There are no right or wrong answers when it comes to deciding whether being self-employed vs director of a limited company is the best option for you. Quite simply, as long as you are registered with the government and pay your taxes, either option is fine.
Now, let’s break down the main differences and help you decide which one might be better for you.
Self-Employed vs Director of Limited Company: Liability
For me, this was one of the main reasons for registering as a Limited Company. Basically, as a Limited Liability Company, you have your own legal identity. As a director, you are classed as a shareholder so your liability is limited by shares. This means it affords you some personal protection.
A sole trader and their business are connected. There is no distinction between you and your business so any business debt becomes your debt and unfortunately, your personal assets are not protected.
Self Employed vs Limited Company: Tax
All sole traders need to register for tax with HMRC. You then need to submit a self-assessment every year. The tax year runs from 5th April to 6th April and the deadline to submit your tax return is 31st January the following year. You will be taxed on any profits made by your business which fall outside of your personal tax allowance.
As a Limited Company, you have both your director’s tax and company tax to take into consideration. Even if you don’t earn any money from the Company, you need to submit a self-assessment to HMRC the same as a sole trader would.
If as a company director, you are also listed as a shareholder you are entitled to a tax-free dividend of £2000. Any salary and dividend need to be declare in your self assessment.
The tax year for the company starts from when you registered the Company or when you started trading so each company will have a different year end date. Corporation tax must be submitted and paid within 9 months of the accounts year end and even for a small busines is charged at 19% (as at the time of writing this post).
As well as submitting a tax return to HMRC, company accounts will also need to be submitted to Companies House. The accounting is one of the main downsides to becoming a Limited Company. Unless you are good with accounts, most people will need to pay an accountant to do the work for them so it can get pricey.
Accounts and Tax Returns
There is a lot more work that goes into creating and filing accounts for a Limited Company and as I mentioned, it can get a bit expensive if you do it wrong or need the help of an accountant.
A Limited Company must prepare annual accounts which are also known as ‘statutory’ accounts. These are submitted to HMRC, sent to all shareholders and to Companies House. Company details must be kept up to date so a Confirmation Statement is also submitted on a yearly basis.
It is not a legal requirement for sole traders to file any accounts other than their
So Which Should I Choose?
Remember, there is no right or wrong answer here so choose whichever you think suits you best. If you are not sure, I would recommend starting as a sole trader to see how that goes.
Just remember, when you are submitting your self-assessment you will need to declare any other income. If you are self-employed and working in other employment any wages you receive will affect your tax liability.
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Haley is an online entrepreneur specialising in branding and digital media marketing. She has spent the past 7 years working with local businesses and organisations and helping them increase awareness of their brand and ultimately, increase sales. Haley set up The Boss Babe Empire to encourage others to follow their dreams. With the help of a supportive, knowledgable community, her aim is to offer inspiration, motivation, guidance and support to other female entrepreneurs.