Should I trade as an individual, or as a limited company?
Oh, that this were an easy YES/NO!
I advise many people on this, but it’s their decision in the end. And there’s no RIGHT answer. It’s what suits you best.
Here are some of the “weights” on either side! They’re the main issues my clients consider, though I’m sure they’re not exhaustive.
As an individual
- you can utilise your Personal Allowance (PA) – currently £10,600 – before you have to pay tax. There’s no PA for a company – you pay tax the minute you make a profit of £1. However, if you already pay PAYE through another employment, this may not be a problem.
- you can run the transactions through your personal bank account, you don’t have to open a business one (though you may need to check with your bank that you’re not breaking their T&Cs for a personal account).
- you don’t have to register anywhere or make legal returns EXCEPT to HMRC.
- you can call your business more or less anything you like! (though I don’t recommend you call yourself Harper Collins unless you enjoy facing lawsuits *g*). This doesn’t have to be your legal name.
- all your profits are taxable, whether you personally spend them or save them, though you can reduce them with valid business expenses.
- any search/credit request/reference will have to come from your personal details.
- if you offer services e.g. a contract worker, you shouldn’t restrict yourself to working for only one company. To be self-employed means you seek a range of clients. If you only work for one, HMRC may view you as, in effect, an employee and insist you’re put through a payroll.
- if you run into financial difficulties, your personal situation – and assets – are at risk.
As a company
- you’re a separate legal entity. Anyone pursuing the company for any reason cannot pursue you as a person as well. It can minimise any risk of financial loss (not that you start trading expecting to make a loss, but still…!). The risk stops at the assets of the company. You also have a legal status in the market: you may be perceived as more professional and committed to your business.
- you must give your real name as a shareholder of your business, and this is a public record. However you can direct all business correspondence to an office address e.g. your accountant, so you don’t have to disclose your address as well.
- you have to open a company bank account to trade through.
- any search/credit request/reference can be based on the company’s accounts rather than your personal situation.
- you can’t choose a business name that’s already registered, or is too similar to another registered name.
- you have 2 reporting hats: one to HMRC for tax, and one to Companies House for your legal status. This isn’t necessarily onerous, but is mandatory, and penalties can be incurred if you’re late reporting. You will have extra filing fees to pay to Companies House, and additional accountancy charges.
- you may pay tax at a lower rate than as an individual. There’s no non-taxable PA for a company, but there are lower rates of tax, depending on your profits. It really depends on what other income you have / what personal situation you’re in, but can be planned for the best result. For example you can draw a salary from the company as an employee. As there’s an amount that can be paid without PAYE/NI, this can be a useful tax planning tool.
- you can work for one or many clients, without being challenged by HMRC. The clients will pay you as a supplier, rather than as a personal employee. That said, it’s generally risky to rely on only one or few clients.
It’s by no means clear cut either way.
Some people like the idea of a separate identity for their business, under a registered company.
Some people prefer the lesser administrative burden of trading under their own name.
You need to keep records of your income and expenses – whether paper invoices / statements / emails / online receipts etc.
And remember to inform HMRC when you start to trade. You can be penalised financially for reporting in late to them!
I didn’t think a Ltd company had to have its own bank account. Some businesses might run entirely on a cash basis and some directors may struggle to open a business bank account because of a poor credit history. I thought it was enough to keep good records of income & expenditure relating to the business.
For me and many others, as writers, it is complex because, of course, we have other jobs too.
You’re right that one of the most important things is to keep good records. But because a company is a separate legal entity, it must have a separate bank account in its legal name as well. I’m not personally aware of anyone who’s had trouble setting up an account, even if the company hasn’t started trading i.e. it has no credit history to date. You usually need the Certificate of Incorporation, passport and proof of address to set up an account.
I suppose if a business trades entirely in cash, it could manage without a bank account at all. I don’t believe it’s obligatory to have a business bank account if you don’t use a bank at all – but the business owner cannot legally trade company business through a personal bank account.
There are also transactions a company has to make legally that would require a bank account/card, e.g. paying for the annual return to Companies House. These can’t be settled in cash.
To say nothing of the apoplectic fit HMRC would have over an entirely cash business LOL. I’m by no means implying a cash trader isn’t as honest as anyone else, but the risk of mis-management and mis-reporting is so much higher.
I don’t find it as complex as you may think, although of course I’m used to dealing with it. And also because the principles of running a business require the same level of care and attention that any job does. But yes, there are responsibilities and duties that accrue to any business, and these are more with incorporation.
Thank you, Clare. This is all very interesting and helpful for many people I’m sure, not just me. H x