Being self-employed implies a level of freedom that seems extinct in the rest of the business world. That’s why millions of people dream about “being their own boss”.
There are two ways to go about it: you can choose to register as self-employed, or as a limited company.
Perhaps the self-employed option seems like the easiest way to start. But if your entrepreneurial endeavor becomes a successful business, that business will inevitably grow. To some, making a transition from being self-employed to being a company – even if it’s a limited company – can seem rather intimidating.
What’s better? To seize the day as self-employed, or make an effort to register as a limited company? What’s the difference anyway?
The simplicity of self-employed
Registering as self-employed is by far the simplest way to start a business in Ireland and the UK. It requires the minimum amount of bookkeeping and administrative work in general, which some people decide to do themselves (although hiring an accountant will still make your life easier and your business safer on the financial and legal side). Also, the penalties for bad paperwork are generally lower than for limited companies.
And it’s not the only thing made easier when you’re a sole trader. Generally, you’re fully in control of your business and can focus on actually doing your job. Less work around administration means that you can set up your business as a side project, without having to discuss it with your current employer. This is partially possible due to the privacy you enjoy as self-employed – all the details of your business are kept private. And in case everything goes wrong, it’s easier to close business as self-employed than as a limited company.
Of course, nothing is perfect. By having a business in your name, you’re at risk of losing your personal belongings in case you end up in debt. As a contrast to that, limited companies have limited personal responsibility, as their name implies.
There is also the question of reputation. Many people choose to operate as a limited company simply because their clients – usually the big, serious and well-paying ones – won’t deal with sole traders. Since self-employed businesses are easily closed and data is kept private, many clients tend not to trust them.
A limited company – limited responsibility, less limited opportunities
Doing business as a limited company and adding a title to your name makes you look more reliable and dedicated in the eyes of your potential clients, some of which may choose to trade only with those who have a company status.
Perhaps the sleekest feature of working as a limited company is the fact that your responsibility is limited – in the case of bankruptcy and debt, you can only lose what you’ve officially invested in business.
Surprisingly, although you will certainly have to invest in accounting and other taxes, limited company status can bring you some tax savings, since you’d be able to take a dividend.
The tax you will surely have to pay once you become a limited company is the Corporation Tax. And spending doesn’t end there. All the extra administrative burden means more expensive accounting services. Since as a Ltd. your company actually has a real structure, you’ll need to appoint directors, register properly, and disclose company accounts and annual returns. To help you do all this smoothly, turn to a company like Accountant Online, who can help you with all the paperwork and legalities.
All things considered, you will have to invest more money and time in a limited company, But, it could pay off quickly – you will have a better chance of winning over bigger and wealthier clients.
In the end, what’s better?
There are advantages and disadvantages to both the self-employed and limited company option. The real question is how to choose the right option for you personally.
Neither of the two paths are „wrong“. Also, nothing is set in stone – some people see moving on from self-employed to a limited company as a natural and needed step once their business grows beyond a certain point.
If you are unsure what would be the best option for you, an experienced accountant could consider your case and help you out. You’re going to need one anyway once your business starts to grow.
The final choice between being self-employed and creating a limited company should be based on your own possibilities, ambitions, and preferences. The only important thing is to make an informed and well thought-out decision.