Sole Trader or Limited Company - which is best for a Freelancer

Sole Trader vs. Limited Company: Choosing the Right Structure for Your UK Freelance Business**
Hi I'm Bev Thorogood, the founder of Floresco Training and Coaching. I embarked on my freelance journey in April 2018, leaving behind a long-standing career with the Ministry of Defence to start my own business.
In this article, I want to share my experience of setting up and running a freelance training business in the UK, and why I made the decision to change my business structure about two and a half years ago so hopefully it might help you to decide which is right for you too,

Starting as a Sole Trader

When I first started my business I was 52 years old and I was pretty clueless about how to set up and manage a business. My primary motivation was to gain independence and have more control over my daily schedule.
Self-employment appeared to be the most straightforward path, so, following my husband's example, I registered as a sole trader.

Setting up as a sole trader in the UK was relatively simple and cost-free. My husband, who had already taken this route, helped me navigate the process. I registered for self-assessment, received a unique tax reference (UTR), and essentially became responsible for my own tax returns.

In the early stages, my involvement with financial side of my business was minimal. I was pretty disorganised but I managed to keep track of my income and expenses, which I handed over to my husband Mark at the end of the year so he could do my tax return. After the first year, I decided to outsource to a bookkeeper and I hired an accountant to handle the more intricate financial aspects like doing my end of year tax return.

At this point, I wasn't VAT registered, and life as a sole trader was straightforward.

Transitioning to a Limited Company

However, after a couple of years in business, I began to question whether being a sole trader was the best choice for my business. That's when I decided to register as a limited company. Before delving into why I made this decision, let me explain the key differences between the two.

As a sole trader, you and your business are one and the same thing. This means that you have full liability for any debts or legal issues, putting your personal assets and possessions at risk. In contrast, when you operate as a limited company, you and your business are viewed as distinct legal entities, limiting your liability to your business while protecting your personal finances and assets.

The Pros and Cons

Now, I must clarify that I'm not an accountant, so I won't be sharing complex financial terminology and I’m definitely not offering accounting advice. It's essential to consult a professional accountant to determine which structure aligns with your business goals. However, I can share my own experiences and insights to help you navigate this decision.

Pros of Being a Sole Trader:
- Simpler bookkeeping and tax returns.
- More financial privacy, as your business details aren't publicly available.
- Lower initial administrative costs.
- Easier to manage finances personally or with a bookkeeper.

Cons of Being a Sole Trader:
- Personal assets at risk in case of business-related issues.
- Limited access to investment or business loans.
- Potential exclusion from certain corporate contracts and opportunities.

One significant reason I switched to a limited company was the challenges I faced when bidding for contracts with large corporations and government departments. Some of these had policies against working with sole traders, citing the lack of visibility through Companies House as a concern. Given that I primarily worked with these organizations, losing even one contract due to my business structure was costly.

Pros and Cons of a Limited Company

Cons of Being a Limited Company:
- Increased complexity and administrative burden.
- Higher initial and ongoing costs.
- Requirement for a dedicated business bank account.
- Difficulty in moving money between personal and business accounts.

Pros of Being a Limited Company:
- Enhanced protection of personal assets.
- Potential tax benefits through different income streams.
- Improved access to corporate contracts and opportunities.
- Perception of a more established and reliable business.

One unexpected benefit I discovered after incorporating my business was a change in perception. There seemed to be an assumption that a limited company was more substantial than a sole trader, which attracted clients who might not have considered me previously. This perceived professionalism positively impacted my client acquisition and revenue.

VAT Registration

Another consideration when setting up your freelance business in the UK is whether to register for Value Added Tax (VAT). While it's not mandatory until your revenue exceeds £85,000, there are advantages to VAT registration, especially if you work primarily with corporate clients.

Reasons to Register for VAT:
- Corporations often expect suppliers to be VAT registered.
- Simplified onboarding process with corporate clients.
- Ability to claim VAT back on business expenses.
- Perception of greater professionalism and credibility.

However, if you have both corporate and private clients, you may need to charge VAT to all clients, potentially affecting your pricing strategy and profit margins.

In conclusion, your choice between operating as a sole trader or a limited company in the UK depends on various factors, including your business goals, client base, and financial circumstances. While I spent my initial years as a sole trader, I ultimately transitioned to a limited company due to the advantages it offered in terms of liability protection, access to contracts, and perceived professionalism.

Remember that my experiences are specific to the UK, and the regulations and considerations may differ in other countries. Consulting with a qualified accountant is essential to make an informed decision aligned with your freelance business goals.

Starting your own business is a journey filled with learning experiences, and it's crucial to choose the structure that best suits your needs. Whether you begin as a sole trader or opt for a limited company, both paths offer opportunities for success in the world of freelancing.

If you found this article helpful, please feel free to share your thoughts and experiences in the comments below. Good luck with your freelancing journey!