When you’re first starting your business - you might have heard about the various routes you can take: Sole Trader or Limited Company.
Most small businesses in the UK are sole-traders. In 2023, of the 5.5M small businesses with 0-49 employees in the UK - 56% were sole-traders, and 31% were trading as a registered company*.
Understanding the differences between “sole-trader” and being a “limited company” director is important, as they have different benefits and risks, administration responsibilities and implications for tax.
Take some time to understand the pros and cons of each approach, the differences in how you’re taxed, your possible take-home pay, the requirements placed upon you, the liability and risks you take on, and what it means for you as an individual.
You are able to start as a sole-trader and then start a limited company later on, if you decide that is more appropriate or your circumstances change.
Some sectors and clients prefer working with freelancers who are registered as a sole-trader, some prefer working with limited companies.
Some sectors even refuse to work with individuals if they’re registered in a certain way.
It’s important to do some research to see which is more common in your chosen industry.
If you’re considering registering a limited company, there are also considerations to make around something called “IR35”, especially if you’re going to be the only employee of your business.
You might also hear the phrase “sole proprietor” (which is another term that is often used interchangibly with sole-trader), “company director” (which is what you’d be if you registered a limited company), and “personal service company” or “PSC” (which is another term for a limited company providing the services of a single individual).
You are not a “sole trader” as a “limited company” director - although many limited companies only have a single director and single employee - which might be where the confusion arises.
It’s also entirely possible that you may have multiple forms of income: as an employee (under PAYE via umbrella companies or direct with an employer under contract), as self-employed (responsible for paying tax via self-assessment) and as a employed director of a limited company (as an employee of your own business).
It can be complex, and having an accountant to advise you can be beneficial.
Technically, you are only classed as “self-employed” for tax purposes when you’re a sole-trader (or in a partnership).
If you’re registering a limited company, where you are the sole owner, director and employee - you are not self-employed from a tax perspective, although many people who run one person limited company will describe themselves as self-employed.
“Freelancer” has no standard definition or meaning for tax purposes - so you can be a sole-trader, the director of a limited company or a number of other alternatives - the choice is yours.
1/ Read some of the guides from the ecosystem to understand the differences, advantages and drawbacks of the various forms of starting a business. Many guides have useful comparisons of the two approaches, along with pros and cons.
2/ Speak with fellow freelancers in your industry, and understand the situation in your particular sector - what is the most common form of working, and what drawbacks might not following that path have?
3/ Consider speaking to an accountant who specialises in freelancing or small businesses to get their input. Professional advice can be invaluable, and save you a great deal of time and money in the long-run.
4/ Remember, that nothing is forever - even if you register as a sole-trader or start a limited company, you can change your employment status at a later date, although ceasing being self-employed as a sole-trader is easier than ceasing owning a limited company.
5/ You’re probably going to need to register for self-assessment, regardless of which approach you take. If you aren’t already aware of what self-assessment means, you’ll need to look into that too.
Let us know your story and experience of sole-trader or limited company - and we'll include some of your stories in the guide, for fellow freelancers to learn from.
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