Traditionally this was the route that most freelancers took. Trading as a Sole Trader involves less admin and reporting than trading through your own Limited Company, however the down side is you will pay more money in tax and take home less.
As a Sole Trader, legally you and your business are the same entity; therefore if you make a mistake and cost a client a lot of money they can sue you. This means all of your personal possessions are at risk including your home.
By trading through your own Limited Company you get limited liability. This means if you make a mistake only your company is sued and your personal belongings including your home are safe. There are some exceptions - for example if you commit fraud then your personal belongings could still be at risk.
The three main reasons:
1. If you are just dipping your toe in the freelancing world and don't know if it’s for you yet, then being a Sole Trader brings less admin. Once you realise that it is for you, you can incorporate a company and move your business to it - enjoying the many tax advantages.
2. Depending on you personal circumstances there may be some tax advantages to freelancing as a Sole Trader. If you are just starting out and believe you will make a loss in your first few months then you may be able to claim some tax back before incorporating a Limited Company - this is quite complicated so contact us for more information.
3. The belief that running your own Limited Company is hard work and time consuming. If you do all of the admin work yourself and try to prepare your accounts and tax returns then it will be a great deal of hard work. However this is where we come in. We take the stress out by doing all of your admin and compliance work and we more often than not, increase your take home pay by double what our fees cost.
This information is for general information only. We take no responsibility for any action taken or refrained from in consequence of its contents. Always seek our professional advice specific to your circumstances before acting.