When you are starting out as a business there are lot of decisions to be made – one of the most important is to decide whether to setup as a limited company or sole trader. It’s important to understand what they both mean and which structure is more suitable for your circumstances.

Sole trader

This is the most straightforward way for many freelancers or contractors to begin their career as all that is required is to register with HMRC as self-employed within 3 months of trading and then pay National Insurance and Income tax. This structure requires minimum administration and involves submitting a self-assessment tax return every year. Hence, it’s more popular amongst contractors or traders engaged in construction, plumbing, electricians and transport.

Sole trader structure is usually less tax efficient as the individual is the business and hence pays personal tax on the income generated. Further, there is no legal distinction between the personal and business finances, implying personal assets can be considered to settle business liabilities like debts or loans.

Limited Company

Limited company on the other hand is the most tax efficient way to trade and minimise personal liability. Limited company is considered as a separate legal entity from the owner and hence the liability is limited, implying they’re not personally responsible for any liabilities incurred by the company.

The below table summarises the fundamental differences between both the structures

Comparatives  Sole Trader  Limited Company 
  Administration  Low Administration.
There are less statutory obligations. 
High Administration.
There are greater statutory obligations as a Director. 
Liability   You are personally liable for your own finances and possessions may be at risk if things go wrong.  You are treated as separate from your limited company; you are protected (provided you meet your statutory responsibilities as a director) from the threat of personal financial losses if things go wrong. 
Costs and Accounting   Setup cost involved is low and the paperwork is very simple as there is no requirement to register your business at Companies House. You only need to inform HMRC within 3 months of trading. Also, accounting is simple and less costly.  Setup cost is high as various registrations are required with Companies House and HMRC. Moreover, because of a range of statutory obligations accountancy cost is usually higher. 
Status   Some companies look more favourably towards limited companies and recruiters typically will not engage with Sole Traders.  Some companies view a limited company in a more positive manner. Larger companies may refuse to transact with anything other than a limited company. 
Tax Planning   Limited scope for tax planning. There are tax planning opportunities like spousal dividend planning, timing of dividends etc. giving you more flexibility hence tax savings 
Confidentiality   Information is kept private and confidential and is not available to the public as opposed to a limited company.  All information like Director’s details, annual accounts and companies trade is publicly accessible. 

DNS offers a full range of Sole Trader services at a fixed annual fee with no hidden costs. We can register you with HMRC and assist in filing VAT returns, preparing sole trader accounts and advise on expenses. Please contact us on 0330 088 6686 to find out more.

How We Can Help?

If you are still not sure which is the right option to run your business or if you have already setup and want to understand tax mitigation strategies, then DNS Accountants can help you. For more information on the support we can offer please contact us today.

Why Choose DNS?

  • Award Winning Accountancy Firm 
  • Free Online Accounting Software 
  • Dedicated Account Manager 
  • Tax Planning 
  • Full Bookkeeping 
  • Free Business Growth System 
  • Regulated Accountants 
  • Regular Management Accounts 
  • Unlimited Email and Telephone Support 
  • Guarantee of Satisfaction and No Penalty 
  • Weekend Support 

Please speak to one our experts today on 0330 088 6686.