Since the recession began in 2008 there has been an explosion in the number of self-employed individuals. This trend has been a global one and is not unusual in difficult economic times; the simple fact that jobs are scarce is enough to make many people consider working for themselves. Advances in technology that have made running a business single-handedly much easier have also contributed to this trend. For those individuals who have made a success of working for themselves and seen their business expand, the next step is often the question of whether to stay as a ‘sole trader’ or to form a Limited Company. So how do you set up as a company and is it right for everyone?
A Limited Company is considered in law as an entity in its own right. As a sole trader you remain liable for your company’s income and out-goings; this means that your personal assets (house, car, savings, etc.) can be at risk if your business owes money. A Limited company is a separate entity to you and is liable for the businesses debts from its own assets. This can make the structure a more suitable (and less risky) proposition as your business begins to grow. This can be a significant consideration for those looking to borrow money to expand their business and can eliminate the risk to your own assets.
A sole trader and a Limited company are taxed differently and this can be another reason that many small firms choose to establish go limited. There are advantages and disadvantages to the tax system applicable to Limited companies. The basic difference is that a company will pay corporation tax, while a self-employed individual will be taxed on all of their business income at the personal tax rates. In the case of a Limited company, after corporation tax, any income you draw from the company will then also be taxed at your personal rate. Once you fall into higher rate personal tax categories this can make the Limited company structure more attractive – but for those on lower incomes it may make little difference or can result in paying more tax. National insurance rates also differ for Limited companies and sole traders and both the company and employees will make NI contributions in a Limited Company structure.
Being self-employed can mean considerable administration in terms of time, but there are few additional costs other than tax. Limited companies will require a higher level of administration and there are some associated costs. An annual return must be filed with Companies House and the cost for this varies depending on whether it is done online or on paper. Normally it’s advisable to arrange for an accountant to deal with the administrative side of running the company to ensure everything is managed correctly, but again this will entail an additional (though rarely extortionate) cost, compared to being self-employed.
In general forming a Limited company will be the right step for those with higher turnovers. Company Formation 123 can help to set up your Limited Company at a competitive rate.