Fi Shailes
Guest writer
Posted 5 months ago

Limited company or sole trader?

When you’re starting your own business, one of the first things you’ll have thought about is whether to operate as a sole trader – or set up as a limited company. And in many situations, a straightforward answer about what’s best for you and your circumstances may not be immediately forthcoming.

Like most things, there are pros and cons to running your venture as either. Whether it’s the ability to claim a particular ‘something’ against your income for that tax period, the fact it’s just simpler, or the financial protection one may provide over another, it’s really ‘horses for courses’ when it comes to making that decision.

Susan Heaton-Wright is based in Hertfordshire and has been running her business, Viva Live Music, since 2005. It began as a limited company back in 2005, but 2018 saw Susan make a switch to operating it as a sole trader.

Susan was advised to set up straight away as a limited company back in 2005, but she had also realised that her target buyers (mainly corporate businesses and venues) seemed to prefer doing business with limited companies at the time. Over the last few years, however, she started noticing a change in buying behaviours:

“I believe the requirement for suppliers to be an official ‘limited company’ has changed. I know that many of my clients now buy in different ways, and they seem far more comfortable dealing with sole traders/freelancers these days. The age of digital also means that many customers purchase their suppliers via a variety of online sources – the hiring process can be a less formal one.”

Her limited company was already profitable, but Susan knew that switching to being a sole trader might work better for her business in the long-term. This was because she already had other business ventures – all of which were operated under the guise of ‘sole trader’. Switching, therefore, made things easier from an accounting perspective, as Susan’s accountant was then able to do her personal accounts all together (separating the different businesses through good bookkeeping).

Sutton-based content writer and strategist Lauren McMenemy doesn’t think she’d ever formally switch back to being a sole trader.

“While it undoubtedly involves more red tape and legal requirements, I haven’t regretted setting up as a limited company.”

She started her business, The Content Type, in September 2016, and in November of that year, she switched to operating as a limited company.

“Any potential clients I spoke to seemed to feel that dealing with a limited company gave them certain protections compared to dealing with a sole trader/freelancer. The very word ‘freelancer’ can have negative connotations with many in the business world, and the fact ‘free’ is part of that word can wrongly indicate to some that our work is throwaway, cheap or non-essential.”

And when Lauren researched setting up as a limited company, she realised it would provide her with some benefits not available as a PAYE or sole trader.

“Dealing as a limited company does actually make me feel more professional and confident. I feel like I can go in to bat with the big-hitters, and that I’m taken more seriously as an official entity.”Even though her business has the limited company ‘stamp’ on it, Lauren still refers to herself as a freelancer in informal situations.

But what if you are in a situation where you’ve made a transition, but then start to change your mind?

Web designer Ann Warne, whose business Web Design Unlimited is based in Buckinghamshire, has recently been toying with the idea of going back to being a sole trader, but finds something always stops her…

“There is precious little tax benefit for me now that the dividend tax credit has been reduced. Claiming some business expenses, such as broadband, can also be problematic when you’re operating as a limited company – it’s impossible to say exactly how much of the ‘domestic’ service provided was for business purposes, so I was forced to take out a ‘business’ service with the same provider, and it was twice the price!”

Ann decided to make the switch to limited after she secured some regular work for a client in around 2002; in fact, one of their requirements for her working a contract for them was that she did it as a limited company.

So what’s causing Ann to hesitate in making a potential switch back to sole trader status?

“It’s probably the upheaval of getting a new bank account sorted and all of my current clients having to set up their payments to me again. Plus the ‘fear factor’ if one of my clients decided to sue me over something one day. Unlikely… but I don’t want to chance it!”

Natalie Persoglio is a freelance social media, PR and marketing consultant at Northern Bee Creative, based in Warrington. She had originally set up as a sole trader in 2008, but in September 2018 she registered as a limited company. The catalyst for this was the offer of more regular work with two of her existing clients – their contract terms required Natalie to be paid as either an ‘umbrella’ company or a limited company.

“I feel that there is so much more that’s open to me now, in terms of potential new business. The way my company is positioned means that I can employ a team if I need to, and strengthen my offer for future pitches.

“The only tick in the ‘cons’ column for me is the financial paperwork, and I do spend a little more time on that now, compared to when I was a freelancer. But, I have a brilliant accountant, and there are so many step-by-step guides and social media groups out there if I need some support.”

What I noticed in these stories is that three common themes run through them:

There’s ‘perception’ – How existing and future clients might see you. Lauren believed that being able to present her business as a limited company looked more professional to some, and most of the ladies I spoke to did find that operating as a limited opened new doors for them.

There’s ‘paperwork’ – The burden of doing your taxes, not mention doing them right. So being able to rely on a good accountant seemed key. Ann even said to me that if she ever switched back to being a sole trader, she’d still pay an accountant to sort out her tax return.

And there’s ‘protection’ – Susan took out business insurance once she’d switched to being a sole trader, and conversely, Ann’s reasoning for not moving back to sole trader status is partly based on the legal protection of her personal assets which being  ‘limited’ currently provides.

In a nutshell

What the selection of stories above really demonstrates is that a reasonable amount of research should always be done before you make a decision on whether to run your enterprise as a limited company or not. And that if you opt for one over the other, there’s always the option to switch back if you find it’s not working out.

Whilst a limited company set-up can serve some people perfectly well, others might find that operating as a sole trader or freelancer is really what suits them best. It’s all down to your own unique set of circumstances and preferences…

Share this article

Free yourself from business admin

Download Coconut on iOS or Android. Open an account in minutes with a passport or driving licence. Once you’re approved, you’re ready to do business.

App Store
Google Play
Coconut - Tax