When you are working for yourself, perhaps without a team of people around you, then it can be natural to choose the sole trader route, which is basically just saying that you’re self-employed. But even if there is just you, depending on how much you are making, there is a lot to be said of operating as a limited company instead of a sole trader, as there are a number of benefits.
Being a sole trader can be a simple way of doing things, because setting up a business as a limited company does involve a much more complex formation process. Plus, the financial responsibilities, as well as the administrative, are definitely more than that of a sole trader. While looking up a company formation guide can be a big help if you decide to go down that route, it is a good idea to know the ins and outs of running a limited company. Then you can see what is going to be best for you, and what the differences are. Here are some of the things to think about.
As a business owner, money and cash flow are big things, and when you run a business as a limited company, it is more likely that you will pay less tax than a sole trader would. The reason being is that there are things like corporation tax, and if you are down as the director of the company (as you should be), you can take a salary, or draw it through the more tax-efficient way of taking a dividend. So in the long term, being a limited company could mean that you take more of your income home with you.
If you run your business as a limited company, then as the name suggests, you have the assurance that you have limited liability. So if you are assuming that no fraud has taken place, then the limited liability part of it all means that you won’t be personally responsible for any losses that the business makes. So there is an added level of protection, which in business, can be a really useful thing. If you are just registered as self-employed, then you don’t get to have this same protection.
If you choose to have a limited company, then it is literally that, a company. And as such, it is a completely separate entity from you. Being self-employed might mean that you still get paid into your normal bank account, for example. But when you have a company, it will be a company bank account and company card that you will use. You can have assets as a separate entity, and contracts that you have with clients will be purely business as well.
Finding some funding for any business can be difficult. But it is going to be even harder if you are simply self-employed and are just one person running things. But because you have a limited company and it is a distinct entity from you, then it can be simpler to approach banks or lenders, in order to secure some funding.