Self-Employed vs Limited Company: Which is Right for my Small Business? [Infographic]

Author: Russell Smith
September 26, 2016

Being self-employed can be hugely liberating. You’re doing what you love and you’re in complete control. But what type of small business should you be? One attractive option is to become a limited company. Here’s all you need to know about the choices you have.

 

Infographic on the pros and cons of self employed vs limited company for small businesses in the UK

 

Self-Employment

 

Setting up as a sole trader (another term for self-employed) is quick, easy and the simplest business type on offer. For anyone just starting up, this is a great place to start. There are some downsides, though, and as your business grows you may want to look into the benefits of a limited company.

 

Pros

 

  • Quick and Easy

 

Registering as a sole trader is simple. Much of the process can be done online with the minimum of fuss. Get in touch with HM Revenue and Customs to register your new business for tax and you’re almost good to go.

 

  • Simple Accounts

Being self-employed means your accounting duties are relatively straightforward. You’ll need to keep records of your invoices, your business expenses and complete yearly tax returns, all of which you can do yourself.

 

  • Easy Access to Cash

Self-employment enables you to access your money whenever you want it. The business’ money is your money, so there’s no complicated withdrawal procedure, as there is with limited companies.

 

  • Personal Bank Account

As a sole trader in the UK, you can use a personal bank account for your business. This means you won’t face any extra banking charges and, more importantly, won’t have to remember more usernames and passwords!

 

Cons

 

  • Personal Liability

Being a sole trader means, essentially, you are the business. Any debts the business has are your debts, and you are personally responsible for repaying them. These can be secured on your house, so think carefully before you set up as a sole trader.

 

  • Self-Funded

Another downside of being self-employed is that you have to raise funds for the business yourself. These might be in the form of personal savings, loans, or gifts from family and friends. When it’s your money, it matters even more, so this might encourage you to be even more careful with those pennies.

 

  • Lose Business

It’s not uncommon for businesses to only trade with limited companies. Local councils, for example, often prefer this over those who are self-employed because it ensures a degree of security. If something goes wrong with the product or service you’re supplying, as a limited company you will have limited liability. It offers peace of mind to your clients — as well as looking more professional — if you’re a limited company.

 

  • Pay More Tax

This only comes into effect when your business starts generating healthy profits. Being a limited company could save you £1,809 a year if you have profits of £30,000. As your business grows, it’s worth looking into these advantages to see if a change would be beneficial.

 

Limited Company


Though it requires a little more time and effort, setting up as a limited company can offer great rewards as your business grows. You’ll definitely become more familiar with your accountant, but your bank balance will reap the rewards.

 

Pros

 

  • Limited Liability

As a limited company, you are legally separate from the business. If it gets into serious debt, there’s no risk of you being held personally responsible. Limited liability is perfect for those with potentially risky jobs. For example, as a plumber, one wrong move could cause costly damage to a property. Separating yourself from the business ensures your personal security should one of these accidents arise.

 

  • Lower Taxes

A benefit that a lot of small business owners will find appealing is the tax saving. On profits of £30,000, you could save £1,809 in tax as a limited company. That figure rises to £3,821 on profits of £50,000. Who would want to turn down free money?

 

  • Greater Credibility

As a limited company, you might find yourself getting clients that were out of your reach when you were self-employed. Many larger businesses and local councils prefer to work with limited companies because of their limited liability. It’s also a bit of a status thing, which you can utilise to your benefit.

 

  • Sell Shares to Raise Capital

Unlike those who are self-employed, the owner of a limited company can sell shares to raise business funds. Set your price and others can buy a certain percentage of your business, receiving dividends as a reward for their investment. If you’re a private limited company, you can only sell shares privately (to family, friends or other business partners). To sell your shares on the stock market, you’ll have to become a public limited company, but that’s another issue entirely.

 

Cons

 

  • Need to Hire an Accountant for Your Small Business

Becoming a limited company means you will have to hire an accountant. The requirements for limited companies are around three times more time-consuming than those of self-employment. Here’s a list of the things your accountant will do for you as a limited company:

 

– Personal tax return
– Director’s payroll
– Full statutory limited company accounts for HM Revenue & Customs
– Abbreviated statutory limited company accounts for Companies House
– Corporation tax return
– Annual return
– Dividend vouchers

 

As you can see, there’s a lot to take care of. But if you have profit levels of over £30,000, your tax savings will more than cover the cost of an accountant in the UK.

  • Company Bank Account

Registering as a limited company means you will have to set up a business bank account. These usually charge a monthly fee, but many offer new customers deals that provide discounted or waived fees.

 

  • Shareholders, Directors and Employees

Unlike with self-employment, a limited company requires you to assign official job roles. As the owner, you’ll have to declare who the shareholders and directors are, although you can be both of these yourself.

 

  • Corporation Tax

As a limited company in the UK, you must register for corporation tax. You won’t get a bill for this — you’ll have to work out and report your tax bill yourself. This is where a small business accountant comes in, because the process can be tricky.

 

  • Complicated Withdrawals

As the owner of a limited company, any withdrawals must be in the form of salaries, dividends or loans. Unlike the self-employed, you can’t just take money from the company bank account without notice. This can be time-consuming and awkward, but it also helps keep close tabs on your business’ funds. Setting your own salary might be one of the biggest challenges you face as a limited company — and one which an accountant can help you with.

 

So Which One is Right for You?

 

Choosing whether to set up as self-employed or a limited company is dependent on your situation. For new businesses with lower turnovers and profits, it’s possible to thrive as self-employed. But when those numbers start to increase, it’s a good idea for the health of the business to register as a limited company. The security of limited liability, as well as the potential tax savings, make going limited an attractive choice.

 

For more advice on what is right for your small business, get in touch with Russell, the world’s most prolific chartered accountant blogger. With unlimited support from his team of top-quality chartered accountants, he will take your small business beyond your wildest expectations.

 

 

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