Sole Trader (Self Employed) vs Limited Company
When you decide to become self-employed, one of the first decisions you’ll need to make is to decide on a business structure: operating as a sole trader, or through your own limited company.
There are a few traits that identify sole traders: you’re taxed as an individual (and don’t pay corporation tax), you have unlimited liability (your business isn’t considered a separate legal entity) and you have sole ownership over your business.
There are several reasons why the sole trader structure is the most popular option among businesses in the UK. It’s easy to set up—all you need to do is to register as self-employed with HMRC, choose a business name, and you’ll be all set to begin trading.
And if you change your mind sometime down the road—whether you decide to stop trading or to change to a limited company structure—the process of termination or transition remains fairly simple and straightforward. Unlike with limited companies, there’s no need to take additional steps such as applying to strike off your company.
You’ll also enjoy full control over your business, as there aren’t shareholders you’ll need to answer to. Sole traders also have fewer compliance requirements compared to limited company directors, which means that you’ll benefit from less paperwork, greater convenience and lower accounting fees.
Self Employed Registration Guide
Self Employed Registration Guide
- What is a Sole Trader?
- Sole trader advantages
- Sole trader disadvantages
- How to register self employed
- Sole trader responsibilities
- Self employed tax
- Important self employed deadlines
How to register self employed with HMRC
How to register self employed with HMRC
From starting your side business to going freelance full-time, becoming self-employed can feel scary and exciting all at once.
Before you jump right in, you need to ensure that you're staying on the right side of the law- and this begins with registering as self-employed with HMRC.
In doing so, you can be sure that you're paying the right amount of income tax and National Insurance Contributions, and thereby avoid paying unnecessary financial penalties.
Ready to get started? We've got all the information you need below:
8 Advantages of Being a Sole Trader
8 Advantages of Being a Sole Trader
7 Advantages of Being a Sole Trader
What is a Sole Trader: Meaning & Definition
What is a Sole Trader: Meaning & Definition
7 Characteristics For Defining Sole Traders
Self employed tax obligations guide
Self employed tax obligations guide
When you're self-employed, you have unique financial obligations-especially when it comes to paying your taxes.
When you work for a larger corporation, or even a relatively small business, your company takes on a large percentage of handling your tax responsibilities for you.
As a freelancer or small business owner, you're on your own. You work as an independent contractor for each of the clients you work for-and they don't take taxes out of your check before they send it to you.
How then should you handle the responsibility of paying your taxes?
This guide will help you get started:
Switching from Self Employed to Limited Company
You started out as a sole trader—but as your business scales, there comes a point in time where it becomes more efficient to trade as a limited company.
There are a few reasons why sole traders decide to make the transition.
Their profits may have grown to the point where it’s more tax efficient to trade as a limited company. They may decide it’s time to bring in shareholders or directors, or feel that their business could benefit from the increased credibility that a limited company structure brings.
Here’s what the process of transition involves: firstly, you need to decide if you’ll be the sole director. After which, you’ll need to notify HMRC of the change, select a business name, and register your limited company with Companies House.
Once the registration is complete, there are a few more items to cross off your checklist. You need to inform your stakeholders, set up a business bank account, set up your payroll, update your company details on your business documents and get your accounts sorted out.
Registering a Limited Company Guide
Registering a Limited Company Guide
- What is a Limited Company
- 10 step process for setting up a Limited Company
Disadvantages of a limited company
Disadvantages of a limited company
The advantages of operating as a limited company are well known. It can be a great way to maximise your take-home pay, improve your credibility with customers and limit your personal liability. Like most things in life, it's a case of what's best for your situation. While the positives outweigh the negatives for most people, there are a few things you should know before you make the jump to a limited company.
In this article, we'll outline the disadvantages of operating as a private limited company. Bear in mind that there are many advantages to a limited company and in many cases, these advantages will outweigh the disadvantages, so don't think of this as a report of doom and gloom.
Key considerations when you register a Limited Company
Key considerations when you register a Limited Company
As a freelancer, contractor, or small business, it is typical to start with the simple structure of operating as a Sole Trader.
While taxes and other administrative work may be relatively easy when you are a Sole Trader, as your volume of business goes up, there are more and more reasons to take on the task of becoming a Limited Company.
For instance:
- A Limited Company protects your personal assets. If you are found liable in a lawsuit, only your business assets are at risk.
- A Limited Company is usually more tax efficient than being a Sole Trader.
- Once you have your name chosen as a Limited Company registered through Companies House, no one else can take your company name.
Luckily, running a Limited Company doesn't have to be exceedingly complex, though following a set plan will help to keep the complexity to a minimum.
3 Ways to Register Your Company for Free
3 Ways to Register Your Company for Free
Registering a company is a one off cost of £12 and done through Companies House. However, there are a few different ways that you can get this fee waved with other business services that you need.
We'll walk you through how to register your company for free and the perks that you'll get with each.
What type of business structure is best for you?
What type of business structure is best for you?
If you're looking to the future with the hopes of beginning a journey running your own startup, chances are you're feeling some mixture of excitement, trepidation, and uncertainty when it comes to the finer details of your plan.
Starting your own business is an immensely fulfilling process and an excellent means to flex your creative muscles, but there's a lot of humdrum of business behind the process of turning a vision into a dream.
One of the most important (and one of the earliest) decisions in this process will centre around your business's formation. You'll have to select which type of business structure best suits your goals for the future.
While the choice may sound easy, you'll be well-served by giving the decision ample consideration. The business structure you select will have measurable implications on the way you make money and do business. It'll impact:
- How much tax you pay
- Your degree of personal liability should the business fail
- How much administrative work is involved in the business (both before it comes to fruition and over the course of its life)
- Your ability to finance and fund your efforts
If you make the wrong selection when it comes time to choose a business structure, you could be faced with a myriad of complications in the future.
Paying professionals for guidance and advice once things go wrong is costly and, for many, an embarrassing affair-performing research well in advance will ensure you're making the best choice for your company and that you can avoid losing out on money or pride later on.
Limited Company Filing Deadlines
Being a limited company director comes with several legal responsibilities. In addition to your statutory duties, you’re also responsible for meeting your filing deadlines.
These include:
- File your Self Assessment by 31st January following the end of the relevant tax year.
- If you’re VAT-registered, you need to file your VAT returns 1 month and 7 days after your VAT quarter end date.
- File your company accounts 9 months after your company year-end. If you’re in your first trading year, your first annual accounts are due 21 months after your date of incorporation
- File your Confirmation Statement up to 14 days after the due date. The due date is 12 months after the date your company was incorporated, or 12 months after the date you filed your previous Confirmation Statement.
- File your company tax return 12 months after the end of the relevant tax year.
- If you’ve just begun employing staff or using subcontractors for construction work, you need to register as an employer before an employee’s first payday.
- If you already have employees, there are a number of deadlines you need to meet for your payroll year end.
- Submit your final payroll report for the year before your employee’s final payday for the tax year ending 5th April.
- Provide your employees with the P60 by 31st May (following the end of the relevant tax year).
- File employee benefits and expenses using your payroll software, and submit your P11D and P11d(b) forms by 6th July.
- In addition to the payroll year-end deadlines, you’re also required to:
Send the FPS on or before your employees’ payday. The FPS must be submitted each time you pay your employee. This means that if your employee is paid weekly, you’ll need to make 52 submissions across the year.
What are the deadlines for payment of PAYE taxes?
What are the deadlines for payment of PAYE taxes?
If you're paying salaries to employees or directors, you need to register for PAYE and pay your PAYE bill to HMRC.
- Monthly payments: Your PAYE bill is due on the 22nd of the next tax month.
- Quarterly payments: Your PAYE bill is due on the 22nd after the end of the quarter.
There are various ways to make your payment.
- Same or next day payments: online or telephone banking, CHAPS
- Payments processed in 3 working days: card payments (online), Bacs, cash or cheque payments at your bank or building society, Direct Debit, by cheque through the post
- Payments processed in 5 working days: Direct Debit (if it's the first time you're setting up a Direct Debit payment)
-
Can I change my company's accounting date / year end date?
Can I change my company's accounting date / year end date?
You can change your company's year-end-otherwise known as the accounting reference date (ARD). Changes can be made to your current financial year or the year before.
Your company's financial year can be shortened as many times as you want, with the minimum duration you can shorten it by being one day. You can lengthen your company's financial year by up to 18 months once every five years. If [other conditions apply](https://www.gov.uk/change-your-companys-year-end#:~:text=You can change your company's,the one immediately before it.), such as if your company is in administration, you'll be able to lengthen your financial year more often.
Schedule a free consultation with a specialist self employed accountant
Speak to one of our accountants on a free 30 minute accounting consultation.
Self employed guides, calculators and articles
As a freelancer, bookkeeping is a vital part of your business. This is why it's essential to understand the importance of self-employed accounting software and how it can help you keep all your transactions in check.
In this article, we will explain everything you need to know about cash flow reports, mileage tracking, inventory tracking, and all the advanced features you can access through accounting software for freelancers. We'll also go through a few examples of how to track your business expenses, deal with bank transactions, and secure your financial data using these tools. So, let's get started!
Did you know that if you are self-employed and your business is less than twelve months old, you can be eligible for up to 30 hours of tax-free childcare? That's right. If you live in England and you follow specific criteria, you can claim a childcare account.
In this article, we'll cover everything you need to know about how you can claim tax-free childcare. We will also go through the scheme's eligibility criteria, the steps to apply, and some frequently asked questions that might come in handy when registering for this program. So, let's get started!
Workplace happiness is a hot topic for every organisation. Happier staff lead to higher retention rates, which means less time and money is spent training and recruiting replacements. Which ultimately means running a more profitable business.
While large businesses invest heavily in staff retention and attraction to drive employee satisfaction, we wonder how self-employed people and contractors can apply the same philosophy and tools to their businesses and working lives. With no HR department and limited budgets, these individuals are largely responsible for their own happiness at work.
Fortunately, it is possible to apply the principles of employee happiness that large organisations deploy to your own working life, even as a solo entrepreneur.
How does employee happiness apply to self-employment?
Work happiness is a straightforward concept. It refers to enjoyment and a positive attitude towards one's work. Happy people are excited to go to work, enjoy their work, and are more satisfied and engaged. Workplace happiness naturally impacts productivity and customer satisfaction in a positive way.
Many self-employed people may feel that happiness is a luxury that doesn’t apply to them. Self-employed business owners are far less likely to take mental health or sick days because it impacts their income. They are also more concerned with retaining their customers than their own fulfilment, which can lead to longer hours and burnout.
By refocusing on happiness at work, these self-employed individuals can boost their productivity, motivation and client service.
The FLARE Framework for Workplace Happiness and Employee Satisfaction
Very few of the factors that make employees happy at work are money. Most relate to the human aspects of work. Strong relationships, a good work-life balance, and feeling valued will always mean more to employees than incentives.
I've determined five factors that impact employee happiness, summarised by a simple acronym: FLARE. FLARE is shorthand for:
- F - Flexibility and work-life balance
- L - Learning and Development
- A- Autonomy and Responsibility
- R- Recognition and Reward
- E - Environment and Culture
By ensuring that these five elements are implemented, self-employed business owners and contractors can improve their working lives considerably.
As a sole trader, you pay yourself through personal drawings from your business. We recommend that you use a business bank account, as you’ll need to keep records of these drawings, as well as of your sales and expenses.
To set up as a sole trader, you need to take the following steps:
- Register as self-employed with HMRC online
- Choose a business name
After you’ve registered as self-employed, you’ll need to fulfill the following responsibilities as a sole trader:
1. Abide by HMRC's record keeping requirements
You need to keep records of:
- Your sales and income
- Your business expenses
- Your personal income
- VAT records, if you've registered for VAT
- PAYE records, if you have employees
You need to keep your records for at least five years.
2. Submit a Self Assessment tax return each year
You''ll need to submit a Self Assessment tax return by 31 January each year.
An accountant like GoForma can help you with completing your Self Assessment tax return. You can learn more about the registration process, deadlines, late filing and payment penalties and Making Tax Digital for Income Tax on our Self Assessment guide.
3. Pay income tax and National Insurance Contributions
You'll need to pay income tax, as well as Class 2 and Class 4 National Insurance contributions.
7 Advantages of Being a Sole Trader
Sole traders have sole ownership and full control over all aspects of their business—from how day-to-day operations are carried out to the long-term goals and strategic direction of the company.
Unlike with other business structures, you won’t have to consult shareholders, directors or partners. You’re able to make decisions on your own, act on them swiftly and remain adaptable and responsive to the needs of your customers and changes in the business landscape.
7 Characteristics For Defining Sole Traders
A sole trader is a self-employed person who is also the exclusive owner of a business. The individual is entitled to all business profits of your business after tax has been paid and is personally responsible for all losses.
While sole traders are often considered a one-man business organisation, it’s important to remember that the term ‘sole trader’ refers to the business structure - not the number of employees. While a sole trader trades alone and is self-employed, it doesn’t mean he or she performs the day-to-day operations alone without hiring employees.
.png)
.png){kind=small}
.png){kind=small}