Self-employment vs limited company status: an accountant’s guide

While gaining limited company status is a must if you’re looking to take on additional employees or generate investment, there’s still a grey area when it comes to deciding what type of business you want to run.

Whether you are just setting out in business, or are starting to scope out the wider industry, there are many instances whereby self-employed status would be the more suitable option. Use this handy guide to find out whether it’s time for you to take the plunge and set up with limited company status.

Should I set up my business as a sole trader?

Being self-employed helps to keep things simple. From a legal standpoint, you and your business would be one and the same.

By being a sole trader, you can submit an online form to HMRC and simply start trading. Providing you haven’t taken out a significant loan to finance your sole trader operations (in which case your personal assets would be liable), it’s just as easy to stop trading with this method. Such risk-free trading lets you test out a new profession or market without excessive financial and legal liability.

However, unlike a limited company status arrangement, you would be individually responsible for repaying creditor debts and settling any outstanding legal claims if the business doesn’t take off.

In terms of tax, you would pay Class 2 and 4 National Insurance and Income Tax on taxable profits (20% – 45%). Conveniently, information relating to your tax arrangements need only be recorded on your annual tax return.

While the process of setting up in partnership can be complicated, there are some distinct advantages. If you’re in partnership, you will be taxed on your share of profits only.

Should I set up with limited company status?

If you set up as a limited company status company, you get additional protection as the business becomes a separate legal entity.

Your personal assets (house, car etc.) would not be at risk if the business were to get sued or end up in debt via another means – unless a personal guarantee has been given to the creditor. However, you would have a legal obligation to safeguard the assets of the company. If this requirement wasn’t met, you could face a court appearance.

This is change is reflected in your title; your position would change from owner/manager to shareholder/director. Although you could keep hold of all share capital to maintain overall control, setting up as a limited liability company gives you the opportunity to sell off shares in the company and raise funds for future business investment.

Regardless of how profitable the business becomes in future, a corporation tax rate of 20% will be applied to all company earnings. Depending on the amount of money you pay yourself as a dividend, this is likely to be the only tax due. And, you won’t need to pay out for National Insurance.

Tax arrangements would need to be recorded in your accounts, on an annual tax return and corporation tax return. Every registered director will also need to submit a personal tax return. If you intend to be categorised as an ‘employee’, you would need to register as an employer and setup payroll. The accounts and annual return of the company would then be made freely available in the public domain, limiting the degree of privacy afforded to your company.

Of course, all this means more paperwork. But, if the business stakes have already risen, it could be well worth it in the long-run.