Mythbusting - Sole Trader vs Limited Company
by Lindsay Roadnight
last updated: 28/02/2022
One of the most common questions that comes up when people are setting up their private practice is whether to work as a sole trader or register as a limited company. You’ll find a lot of threads on various forums and facebook groups where people address this question and there are quite a few myths that get repeated time and time again. Let’s have a look at a few.
Myth #1 - Sole Traders can't employee people
This is completely untrue. Being a Sole Trader simply means that ultimately there is one person who owns the business. Sole Traders can have employees and sub-contractors.
Myth #2 - Sole Traders aren't affected by VAT
This is completely untrue. The VAT regulations apply equally to all company structures. Whether you’re a Sole Trader or a Limited Company you must register for VAT once your income hits the VAT threshold (£85,000 per annum as at 2021 / 2022).
One interesting point to note with Sole Traders, is that you need to consider all your income streams for the VAT threshold. If you run a number of different Sole Trader operations, once you have reached the threshold you need to apply VAT for all your services.
Myth #3 - Sole Trader is the best option for Private Practitioners.
This is a very common response that I see online when people ask about being a Sole Trader or a Limited Company. In some respects it’s true. For the vast majority of private practitioners being a Sole Trader will be sufficient, but don’t write off the Limited Company option until you have researched it for yourself. There are pros and cons to running as a Limited Company in much the same way as there are pros and cons to running as Sole Trader. To decide which benefits are most applicable to you means considering your entire situation. I would always advise speaking to a Chartered Accountant to get individualised advice.
You can read more about both Sole Traders and Limited Companies on my blog here.
Myth #4 - Running a Limited Company is expensive and complicated
Running as a Limited Company has more overheads than running as a Sole Trader. You may also have additional expenses (such as accountancy fees). However, there are other benefits to running as a Limited Company which might make the additional overheads and expenses worthwhile. Think of it this way, it’s easier to rent somewhere than to buy a house. House purchases involve a lot of paperwork, money and stress, but frequently people will opt for the more involved process as it benefits them in the long run.