Limited company or sole trader?

It depends on how much liabilities you incur, how large your business is and how you want it to develop and grow.

Sole trader

If you pay for most of your equipment and materials when you buy them, don’t get a lot on credit, and want to keep control I recommend staying as a sole trader. 

Your accounting reports are much more straightforward and can all be done by yourself or a bookkeeper (cheaper than an accountant!) and finance software packages are user friendly, relatively cheap and do most of the work for you.   Your accounts can be kept private between you and HMRC – they don’t have to be made public.

You can keep any profits or drawings for yourself and don’t have to set yourself up on PAYE and pay yourself a salary.  But you can employ people and pay them through PAYE if you want

It’s also easier to make claims for working from home if that’s what you do. Most financial software will automatically prepare your self-assessment return and are set up for Making Tax Digital (now being introduced for any sole trader with an annual turnover of more than £50K).

So what if you do run on credit?  And you want to expand the business?

The main advantage of being a limited company is that you are not personally liable for any debts if you had to stop trading, any losses if the company is wound up are limited to what you have already invested.

Limited companies can also have enhanced credibility and open up more investment opportunities – either through your bank or from outside investors.

The main downside is the greater administrative and accounting burden – you would follow certain accounting rules and need to file accounts at Companies House.  This involves appointing and paying a fully qualified Accountant to audit your accounts and do the filing – bookkeepers can prepare your accounts, but an Accountant has to do the final paperwork and this costs around £1K at the end of each year.

This is only a simple overview – the decision rests with you and your current business, risk appetite and long term ambitions.  It’s always best to consult a business advisor first – and this doesn’t has to cost.  Most licenced bookkeepers and accountants are happy to have that initial conversation to help you make your decision.