Limited Company or Self-Employed? What's the Difference?

Limited Company or Self-Employed? What’s the Difference?

When starting a business, there are a lot of big decisions to be made, including whether to go self-employed or set up as a limited company. Every business- irrespective of the size, big or small, must have a legal structure.

Here we will be discussing the processes and legislations to becoming a limited company or a self-employed contractor. Setting up either structure will bring its own benefits and drawbacks. The choice you make is vital as it affects your business, including legal and tax responsibilities.

If you are unsure whether to operate as self-employed or as a limited company then contact CloudCo for accounting advice.

Is limited company or self-employed better?

Operating your company through a limited company has many benefits, but as always, it depends on your circumstances, your business objectives, and financial targets.

Additionally, being a sole trader may be attractive to you since there is a greater deal of freedom in terms of personal liability to others in your company, but with this freedom also comes setbacks.

So, let’s take a brief look at the benefits of each business model to understand which may be better for you.

Limited company

  • Separate legal entity. Even as a shareholder of a limited company, your personal assets are not at risk in the event of solvency or, in other words, if your company is going bankrupt.
  • Tax Purposes. Yes, a limited company is typically better in terms of the taxes you pay, but this is only true as long as tax matters are planned well in advance. Also, the company’s administration and compliance must be done on time and in full compliance.
  • Shareholders and company director. If you are looking to expand your business in the future, and bring in more directors to share the responsibilities, then limited companies certainly provides this scope.
  • Credibility. In all honesty, a limited company does provide you with a certain amount of credibility thanks to having a company director and various creditors and shareholders putting stock into the company.

Self-employed

  • Sole trader flexibility as your own company. Sole traders in the UK can keep their affairs simple and their overall feeds lower in the early days their own business. Also, if things do not work out, unlike a limited company director, you can wrap things up and move on much more easily.
  • Greater privacy as your own company. Your name and details are not in the public domain unlike with limited companies.
  • Cost effective. As a sole trader, you will notice that you gain more personal income providing you correctly balance your tax and national insurance payments. As someone who is self-employed, you really only have to keep track of completing the self assessment process by 31 January each year. Keep in mind that filing a personal tax return as a sole trader is not always easier, therefore, utilising the services of an accountant, such as ourselves, can be beneficial.
  • Tax neutral. If your profits are in the region of £20,000 or lower, then there really isn’t much of a difference between a sole trader and a limited company with regards to taxation.

Corporation tax

Corporation tax rates for a limited company require you to pay 19% corporation tax on your profits and company directors pay their own income tax on the salary they draw from the company. This is not a concern for those operating within self-employment.

Companies house

Limited companies need to register through Companies House, however, this is not a concern for self employed people.

Personal assets

Sole traders are at risk of losing their personal assets if their new business sinks and they owe monies out to various entities, especially HMRC.

What is the difference between Ltd and self-employed?

Comparison between a limited company vs self employed:

Limited Company

Self-employed

A limited company is a type of business structure that has its own legal entity, separate from its owners. Self-employed individuals earn income by contracting with a trade or business directly. It is the simplest form of business structure.
If you are a limited company, you have to file a tax return along with company accounts. Being self-employed means you pay your taxes via self-assessment rather than via a PAYE.
To start a limited company, you need to register with Companies House and appoint a director. As a self-employed person, you have to register with HMRC (this can be done online). Thereafter, you will need to file an annual self-assessment tax return by 31st January each year.
A major advantage of operating as a limited company is that if the business gets into financial trouble, then only the company is liable and not the business owner. The advantage of being self employed is that there is less hassle of filing tax and other documentation.
The disadvantage of a limited company is that there is a lot of admin work, complex legal and reporting requirements. The major disadvantage to being self employed is that there is no legal distinction between you and your company. If your business fails, then you are personally held responsible for any debts incurred.
It is difficult to take out money from a limited company. As the owner of the company, you can withdraw money anytime you require it.
Being limited is the most tax-efficient as you pay corporation tax on their profits. Being self employed means that you need to pay Income tax on business profits.
As a limited company, you can extract money through your company as dividends, providing your limited company is in profit As a self-employed individual, financial benefits such as dividends are not typically available to you

Tax responsibility as a limited company

  • As a limited company you have to pay 19% corporation tax on your profits and company directors pay their own income tax on the salary they draw from the company.
  • In order to take advantage of the tax benefits of trading as a limited company, you can choose to pay yourself a low salary and leave the rest of your profits in the business.
  • This will reduce your PAYE tax liability and your National Insurance Contributions, and you can still pay yourself additional sums in the form of dividends, which do not attract National Insurance. This will leave you with more of your hard-earned money.

Are you self-employed if you are a limited company?

Both distinctions are indeed quite different, but if you set up a limited company, you are still technically classified as self-employed in terms of the structure of your working status. Sole trader is an easy way to set up compared to the limited company.

Deciding to set up a limited company goes far beyond accounting software or coming up with a name. If you have a new business idea and have not yet formed a limited company, you should begin by deciding what structure you would like your new venture to take: do you want to start a limited company or do you want to start up a partnership?

You must appreciate the various statutory responsibilities that come with incorporation. Anyone who has already set up a company will advise you to seek the support of an accountant before setting out on your venture.

Essentially, it is up to you, but it is always best to ask for guidance from a professional in the field.

Talk to us about setting up your limited company or being self employed

If you are looking for help in setting up as a limited company or for which structure to choose, please feel free to get in touch with us. We recommend taking the expert advice of an accountant before rushing into any decision.

We can offer:

  • Prompt and efficient company registration
  • Online limited company formation application at Companies House
  • Affordable business services with guaranteed banking in the UK and worldwide

At CloudCo, our team has years of industry experience and in-depth knowledge, helping thousands of clients throughout the world. We not only specialise in online limited company formations, but we can also offer you a wide range of formation services.

Our services are apt for varied kinds of companies including companies that are limited by shares, limited by guarantee and limited liability partnerships.

If you would prefer to be self employed, then we can also offer tax efficient services as well as general guidance on the rules and regulations of being self employed.