Limited Company vs Umbrella vs Sole trader?

When you go self-employed, one of the first questions you’re likely to ask yourself is, "How should I set up my business?"

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Limited Company vs Umbrella vs Sole Trader

It’s a good idea to make this decision before you start work, but you can always change your status later. Like everything else, getting it right first time will save you hassle, admin, time and expense further down the road. Regardless, you’ll need to register your business status with HMRC for tax purposes.

Which option is best for you will depend on the type of work you’ll be doing, the type of clients you’ll be working for – and how much money your business is likely to generate.

Let’s take a look at the three most common forms of self-employment and how to get started with them.

Limited Company

A Limited Company is a legal entity in its own right. This means its finances, debts and assets belong to the company, not you – or any other shareholders. Vitally, this means your personal assets remain protected if the worst happens and your business fails, and you’re likely to only lose any funds you have personally invested in the business. Companies pay corporation tax at 20 per cent of their profits, which must be settled within 9 months of your year end accounting period. For many self-employed professionals, the Limited Company route also provides the most flexibility when it comes to tax planning. This provides Directors of the company with the most tax efficient income, achieved by taking a low salary and withdrawing additional funds through dividends.

Ltd Co pros

  • the tax regime for Limited Companies is the most favourable of all business structures
  • you’ll not be personally liable for your company’s debts
  • many clients only place work with Limited Companies

Ltd Co cons

  • you’ll be legally obliged to file an annual Companies House return
  • your annual accounts will be publicly available for everyone to see
  • as a Director, you’ll need to file an annual Self-Assessment Tax Return on your personal income

Getting started with a Limited Company

Before you start work, you’ll need to incorporate your business. Start by choosing your company name, then complete and return these documents to Companies House:

  • Form IN01 – information about your business
  • Memorandum of Association – information about your shareholders
  • Articles of Association – information about how you’ll manage the company
  • £15 – by online debit or credit card payment or PayPal

Within a few days, you’ll receive your Certificate of Incorporation. Alternatively, you can set up your business by using an accountant who will do a lot of this work for you, along with making sure your business is registered with HMRC for Corporation Tax and PAYE.

Sole Trader

Starting work as a sole trader is quick, simple and painless. Once you’ve registered with HMRC for self-assessment you can start work. However, operating this way isn’t without risk. Unlike a Limited Company, there’s no limitation on your liability if things go wrong – i.e. you are personally liable for the business, how it operates, and any debts it incurs.

Sole Trader pros

  • there’s not as much admin as the Limited Company route aside from keeping your finances in check ready for your annual self-assessment
  • your post tax income is yours to spend as you wish
  • your accounts won’t be publicly available

Sole Trader cons

  • you’ll have no personal protection from your business debts
  • it may not be as tax efficient compared to working through a Limited Company
  • you can’t claim as many expenses as a Limited Company

Getting started as a Sole Trader

Once you’ve registered with HMRC for self-assessment, you’re good to go. Simply get your name out there and start winning – and doing – business.

Umbrella company

An umbrella company acts as a Limited Company on your behalf. You become an employee of an umbrella company, which then contracts you out. It handles the invoicing and pays you through PAYE. Umbrella companies take the hassle out of running a company, but you lose some of the financial benefits.

Umbrella company pros

  • the umbrella company deals with your tax obligations – you just supply timesheets and any expenses
  • you have no responsibilities aside from your day to day work
  • it’s ideal if you’re ‘trialling’ self-employment for a short time, or don’t want to commit to a full blown Limited Company

Umbrella company cons

  • you are reliant on the umbrella company to process and give you your pay after they’ve deducted their margin
  • you can only claim for limited expenses through an umbrella
  • in the eyes of some clients, working through an umbrella company lacks the prestige of running a Limited Company

Getting started with an umbrella company

All umbrella companies are different. However, most offer a simple signup service via their website or call centres.