Choosing the right business structure is a crucial decision for any entrepreneur. The choice between operating as a limited company or as a self-employed individual impacts your taxes, liability, and how you manage your business. This blog post aims to clarify the key differences between these two options to help you make an informed decision.

Understanding self-employment

When you operate as a self-employed individual, you run your business as a sole trader. This means you and your business are legally the same entity. You are personally responsible for all aspects of the business, including debts and legal obligations.

Advantages of self-employment

1. Simplicity and control: As a sole trader, you have complete control over your business decisions. The administrative burden is relatively low compared to running a limited company. Registering with Companies House is unnecessary, and the accounting requirements are simpler.
2. Tax benefits: You only need to complete a self-assessment tax return each year. Income tax is straightforward, and you can offset business expenses against your income. According to HMRC, the personal allowance for the 2024/25 tax year is £12,570, meaning you won’t pay tax on earnings up to this amount.
3. Flexibility: Operating as a sole trader offers flexibility in managing your finances. You can easily draw money from your business for personal use without the need for formal salary or dividend payments.

Disadvantages of self-employment

1. Unlimited liability: You are personally liable for all debts and obligations of your business. This means that if your business fails, your personal assets could be at risk.
2. Perception: Some clients and larger companies may prefer to work with limited companies, viewing them as more established and credible.
3. Tax planning limitations: As a sole trader, you have fewer tax planning opportunities than a limited company. Higher earnings can lead to higher tax rates, reducing overall take-home pay.

Understanding limited companies

A limited company is a separate legal entity from its owners. This structure can provide various benefits, especially for businesses looking to grow or generate higher profits.

Advantages of limited companies

1. Limited liability: One of the most significant advantages of operating as a limited company is limited liability. Shareholders’ personal assets are protected; they are only liable for the amount they invested in the company.
2. Tax efficiency: Limited companies can be more tax-efficient. Corporation tax ranges from 19% – 25% depending on your profits, for the financial year 2024/25. Additionally, remuneration can be structured through a combination of salary and dividends, potentially reducing overall tax liability.
3. Professional credibility: Operating as a limited company can enhance your business’s credibility. Some clients and suppliers prefer to deal with limited companies, potentially opening up more opportunities.
   Investment opportunities: Limited companies can attract investment more easily. Investors are often more willing to invest in a limited company due to the structured nature and the protection it offers.

Disadvantages of limited companies

1. Increased administration: Running a limited company involves more administrative work. You must register with Companies House, file annual accounts, and submit a confirmation statement. This can be time-consuming and may require professional help.
2. Costs: Setting up and maintaining a limited company involves a number of costs, including registration fees, accountancy fees, and potentially higher insurance costs.
3. Public records: Limited companies must file their accounts with Companies House, which are then made available to the public. This transparency can be a disadvantage if you prefer to keep your business affairs private.

Key considerations for your decision

When deciding between self-employment and a limited company, consider the following factors:

• Income level: Higher earnings may benefit more from the tax efficiencies offered by a limited company. For lower earnings, the simplicity of self-employment might be more appealing.
• Business risks: If your business involves significant risk, the limited liability protection of a limited company can be crucial.
• Growth plans: A limited company structure may be more suitable if you plan to grow your business, seek investment, or hire employees.
• Administrative capacity: Consider whether you have the time and resources to manage the increased administrative responsibilities of a limited company.

Conclusion

Choosing between operating as a limited company vs. self-employment depends on various factors, including your income level, business risks, and growth plans. Each structure has advantages and disadvantages, and the right choice will depend on your circumstances.

We recommend seeking professional advice to ensure you make the best decision for your business. Our team at GHLD is here to help you navigate this important decision, providing personalised advice and support.

Contact us today to discuss your options and find the best structure for your business success.