Sole Trader or Limited Company: Registering Your Business

So you’ve got a great idea and you’re ready to go into business! Or, you’ve started making money doing your own thing, so it’s now time to register your business.

The question is, should you register as a sole trader or as a limited company?

Let’s take a look at the difference between the two, so that you can decide which is right for you.

How do you decide whether to register your business as a sole trader or a limited company?

What is the Difference Between a Sole Trader and a Limited Company?

All sole traders are self-employed, but not all self-employed people register as sole traders.

You need to register as a sole trader once you’ve earned more than £1,000 from your self-employed work in the space of a tax year (April to April). Once you’re a sole trader, you’re personally responsible for all of your business debts, and you’ll also take on certain accounting responsibilities. For example, you’ll have to keep detailed records of all of your income and expenses, and you’ll have to submit your own tax return by 31 January each year. But as the same time, you’ll be eligible for certain benefits, such as tax-free childcare.

So what’s the difference between a sole trader and a limited company? When you register as a limited company, you won’t be personally responsible for all of your business debts. Instead, your business finances will be separate from your personal finances. So if your business ever gets in trouble, you won’t have to worry about personal bankruptcy.

Limited businesses can either be limited by shares, or limited by guarantee. If you’re limited by shares, it means you’re working to make a profit. But if you’re limited by guarantee you’re essentially a non-profit organisation.

Advantages and Disadvantages of Being a Sole Trader

If you register as a sole trader, and if you keep careful financial records, you can rest assured that everything you do will be completely above board. You’ll avoid fines, tax investigations, and other legal trouble. You’ll also only pay the tax you need to pay – no more, and no less. Plus, you’ll become eligible for a number of tax benefits, including insurance premium deductions, deferred payments, and certain tax credit schemes.

Registering your business also sends a strong message to the world – that you’re here to stay, and that you mean business. Certain clients may be unwilling to work with you unless you register your business. Registering as a sole trader could open a number of new doors for you.

But there are some downsides to being a sole trader. It can be a challenge to keep accurate financial records, and submitting a tax return can be a bit of a pain, especially if you’re doing this alone. Any time you spend working on your finances will mean you’ll spend less time doing the things that actually make you money.

Yet the biggest downside to being a sole trader is that you’ll be totally responsible for all of your businesses finances. So if you ever incur significant business debts, you’ll have to foot the bill yourself. You might also have to pay up to 45% income tax, and your pension options will be severely limited.

It’s not all bad, though. If you’re a limited company, you’ll have to jump through many hoops before you can withdraw any money from your business for personal use. Sole traders, though, can use whatever money they have for whatever they want, no questions asked. It’s risky, but some sole traders wouldn’t dream of registering as a limited company simply because they value this financial freedom.

Advantages and Disadvantages of Being a Limited Company

If you register as a limited company, your personal finances will always be separate from your business finances. So if your business faces losses, you won’t be personally responsible for your debt.

Also, we mentioned the credibility that comes from registering your sole trader. If you register as a limited company, this credibility will be amplified. Plus, limited companies are eligible for numerous investment and lending opportunities. Some banks will only lend to incorporated businesses, for example. With this combination of bigger clients and better investment, registering as a limited company could unlock your future growth and long-term success.

Registering as a limited company could also bring you a higher personal renumeration, as you’ll be able to pay yourself a set salary with added dividends. If this salary’s lower than certain profit limits, you could be exempt from paying personal income tax or National Insurance Contributions. You can then top up this salary with dividends from whatever’s left after you’ve paid your Corporation Tax. The system’s a little complex, but you can make a lot more money for yourself operating as a limited company than you could as a sole trader.

But there are numerous downsides to registering as a limited company. There’s a lot of admin and paperwork involved. Your accounting requirements will be a lot more complex. But it’s not just a question of keeping records and submitting tax returns. You’ll also have to register at Companies House, which comes with a fee. Once a year you’ll have to submit your accounts to Companies House as well as to HMRC.

How to Register Your Business

You can register as a sole trader in a matter of minutes. Just head to the government’s online business registration portal to get started.

Registering as a limited company is a lot more complicated, but there’s a helpful guide covering every step of the journey on the government’s website. Find it here.

What Else Do You Need to Consider?

You’ll have to choose an appropriate name for your business. There are certain rules governing the name you can trade under. Head here to learn more.

But the main thing to consider is insurance. Whether you’re a sole trader or a limited company, insurance offers essential protection against almost anything that could possibly go wrong. Insurance could be the very thing to save your business from going under in a crisis. So if you’re a sole trader, insurance could help you avoid personal bankruptcy. At Tapoly, we offer comprehensive insurance packages that will give you the tailored cover you need at a price you can afford. Head here to get a quote in minutes

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