Starting a new business – decide whether to register as self employed or a limited company

Many people are starting up a new business, some have run businesses before and for some this is a new experience. It’s a very exciting time but there can be a lot of decisions to make for which you need specialist advice. So whether you are starting a business because you feel you have no alternative, or because you are now taking the plunge and following your dreams of being self employed, we thought we’d address some of the questions we are frequently asked. The question of whether or not you should register as a sole trader (self employed) or incorporated as a limited company, ie how you are going to register your new business with HM Revenue and Customs.

We believe that forewarned is forearmed. So we thought we’d help. Here’s 10 points to bear in mind.


1. Which legal status

There’s just so much to consider if you’re self employed, a ‘solopreneur’ or sole trader and making sure you attend to the ‘business’ side of your finances is certainly something you really need to address early on. Making sure you’re prepared and you’ve got the right ‘legal framework’ for your business can save headaches as well as heartache later on. You don’t want to be throwing your hard earned money away with inefficient tax arrangements and exposing yourself, your family and your home to unexpected claims and potential loss. So where you do you start?

2. Why a little knowledge is a good thing

You may want to talk this over with an accountant. You can call us for free advice on this. It helps to be prepared to have a proper conversation and don’t be afraid to ask about anything which is confusing to you. We make an effort to speak in simple non jargonistic terms but still, if anything that is said could do with clarification, please just ask. No need to feel awkward. As with most decisions of this type, it is always best to get a ‘professional’ opinion before you proceed. But it does help, we feel, to be aware of the variables so that you can have an intelligent conversation and become more informed. Being aware of the jargon can really help and we believe it’s important to expect a straight forward, down to earth approach. But if someone is ‘blinding you with science’ don’t be embarrassed. Stop them immediately and ask what they mean. Most people aren’t aware of their own jargon because they are so immersed in it. It’s also a nice empowering feeling to at least know what sort of questions to ask and for you to have considered the information you need to have prepared before having the conversation.

3. Main differences between limited company and sole trader

The most common decision is whether to opt to go self-employed as a sole trader or start up a limited company. You’ll be familiar with these expressions, but what’s the main difference? There are different types of limited companies and partnership and umbrella company formations but what we’re talking about is this: A self-employed sole trader is viewed as a whole. The business and you are entwined. One entity. Whereas for a limited company you are effectively separating yourself from the business. You can be a one person business, a sole director. (You don’t need to have other directors legally speaking, although if you are applying for public funding or grants they sometimes prefer to have two people as directors.)

4. Don’t be exposed

The key word here is ‘limited’ and it’s short for limited liability. If you have the misfortune to amass debts and be pursued for them, or be sued for negligence/damages, your home and any assets could be at risk if you are self-employed. However, if you have set up a limited company your personal assets are safeguarded. Obviously there are some businesses which are less likely to have large significant debtors or a damages ‘claim’ against them. Everyone’s different but you might feel ‘safer’ if your business is a limited company because it affords some protection for personal assets.

5. Admin and Systems

In terms of structure and reporting systems, a sole trader with a self-employment registered with HMRC is more straightforward (just remember to register when you start your business). You would be best to use an online package (we use XERO) to account for your earnings and pay tax based on your profit.  Profit is the difference between your business costs and your business income. And the accountancy fees would be lower if you were a sole-trader. So it’s important to balance your sense of vulnerability and your peace of mind with the practicalities of running your business and the necessary bookkeeping.

6. Cash flow and payment periods

Payment for the tax on the profit is due at different times which can have an impact on your cash flow. For example, you pay the tax for each trading year in two equal lumps if you are self-employed, and in one payment if you’re a limited company. Deciding when to start your business can have significant impact on when you’ll be required to pay your first amount of tax, particularly if you’re self-employed. The tax year runs from April 6th to April 5th so if you start a self-employment just into the tax year (after  6th April) you will have the maximum amount of time to pay your first bill, which could end up being end of January two years hence! Beyond that first year, you pay the tax in two equal installments ‘on account’ towards the following year’s bill, if your taxable earnings are above £1,000. However, if there’s expected to be wild fluctuations (particularly decreases of anticipated profit) your accountant can help you adjust the payments on account. If you’re a limited company you have nine months and a day to pay your first tax bill after your first year end. And that is the ongoing annual process.

7. Profit or loss?

What do you expect your profit to be in the first year? Or do you expect to make a loss? If you’re currently in employment you could actually use a loss to lower your tax bill or gain a rebate against your previous PAYE earnings.  But this benefit is not afforded to limited companies. They can only carry forward a loss in the first year (which is obviously helpful) but you can’t pass it back to the previous year or first year trading unless you are self employed.

8. Shareholders or investors?

If you are planning to be in business with others, either as co-workers or as investors, a limited company or partnership arrangement generally makes much more sense. You can allocate shares and everything is more cut and dried.

9. Taxes and contributions

Profits are taxed differently between the two entities. With self-employment you pay tax on all the profit at the current tax rates. And you pay Class 4 National Insurance contributions on all your profit (if you’re under pensionable age). With a limited company you will pay different taxes, with different options. There’s corporation tax to be calculated and you can take money out of the business as dividends as well as a salary. Again your decision will depend on your individual circumstances.

10. Make a decision that works for you

Talking through these and other factors regarding your unique business will help you discover which of these elements are significant for you. An accountant can help you pick the right dates and processes for your business. So one less thing to worry about! If you’d like to talk things through with us at The Accountancy Practice, with no obligation, we’d be very happy to hear from you. Please call 01763 257882 and ask for David or email David@testingspace.co.uk

N.B. If you are considering becoming a limited company in order to be a contractor, mainly working for one company, and have been advised that his avoids PAYE obligations, you need to know that the law has changed with regards to ‘off payroll’ payments. Please get in touch if you’d like to discuss this.

Any information within this article is intended as guidance only. Please do not make any decisions without checking with the HMRC.gov.uk website or a professional adviser to check current regulations. We wish you all the very best with your new venture and hope this overview helps you get a better idea for what’s involved so you can feel more informed and more in control!