Becoming self-employed and working for yourself comes with a long list of positives, counteracting any negatives that you may face along the line too. Working for yourself involves making different decisions and solving problems daily, but one big decision that you need to make at the beginning of your journey is whether to run a sole trader business or set up as a limited company.

Embarking on your entrepreneurial journey involves making these crucial decisions about your business structure and financial management. But making this decision can only be done properly if you’re informed about the options you have and what would suit your way of working.

A recent survey taken by card payments provider ‘takepayments’ showed that 75% of those operating as a sole trader in the UK are unsure of the current tax thresholds that apply to them. The sole traders from a survey of 800 did not know what earnings threshold they’ll pay a higher tax rate of 40% on.

Less than 1 in 10 knew what could happen if they did not pay their tax bill, and 1 in 50 thought nothing would happen to them if they did not pay.

On top of this, the survey revealed that 1 in 5 sole traders do not pay into a pension scheme, and 21% admitted they did not currently have at least 3 months salary saved as a safety net.

Setting up alone does come with its challenges, and getting your head around the amount of tax you need to pay can be complicated. Choosing whether to become a sole trader or a limited company is the first step to knowing your stuff when it comes to self-employed finances.

Should I set up as a sole trader or a limited company?

As a business owner, the choice between sole trader and limited company status significantly impacts your accounting processes. Exploring the key differences between sole trader accounts and limited company accounts and shedding light on the positives and negatives of each could help you decide which framework would be best for you and your work.

Additionally, you may have questions regarding sole trader accounts and limited company accounts, bank requirements, record-keeping, and the need for an accountant for sole traders, which Gorilla Accounting can help with.

Sole Trader Accounts vs. Limited Company Accounts

Structure and Liability:

Sole traders and limited companies differ in their structures, and choosing which way to run your company can be a daunting task.

A sole trader operates as an individual, assuming personal liability for the business’s debts, while a limited company is a separate legal entity with its own liabilities. The finances for the business are not affiliated with your own personal accounts.

Tax Implications:

Taxation is a crucial factor influencing the choice between these two structures.

Sole traders are taxed on their total profits for the year regardless of the level of income taken from the business, whereas limited companies must pay corporation tax on any profits and then personal tax will only be due on any money taken from the company in the form of salary or dividends. Understanding these differences is pivotal for effective financial planning.

Ease of Setup:

Sole trader setups are generally more straightforward and cost-effective compared to the formalities involved in establishing a limited company. This simplicity appeals to many small business owners as setting up as a limited company can take a little more time. However, if you do choose to set up as a limited company, Gorilla can help with your company formation for a £50 set fee.

What are the Positives and Negatives of Sole Trader Accounts?

As with everything, becoming a sole trader and choosing to do your accounts that way comes with both positives and negatives. On one hand, it is a simple and straightforward way of working, only having to answer to your own

  • Simplicity: Sole trader accounts are relatively simple, with fewer administrative obligations.
  • Control: As a sole trader, you have direct control over decision-making without the need for consensus from other directors or third parties.
  • Submission Requirements: Tax compliance is generally less complex for sole traders, simplifying the filing process.

However, there are some drawbacks:

  • Personal Liability: The main drawback is that as a sole trader, you’re personally responsible for business debts, potentially putting personal assets at risk.
  • Limited Capital: Sole traders might find it challenging to raise capital compared to limited companies, limiting growth potential.
  • Tax Implications: Sole traders may face higher income tax rates as their business grows, impacting their take home pay.

What are the Positives and Negatives of Limited Company Accounts?

The other option is to set up as a limited company, in which there are also positives and negatives of. As a limited company, your take home pay can often be higher, however there is much more admin behind the scenes to sort out. However, appointing an accountant can help you overcome this.

  • Limited Liability: Limited companies offer personal asset protection as the business is a separate legal entity.
  • Tax Planning: Limited companies often provide more opportunities for tax planning, potentially reducing the overall tax burden.
  • Raising capital: Limited companies can attract investors, facilitating capital infusion for growth.

Again, it comes with some negatives too:

  • Admin: Limited companies face more administrative requirements, such as annual filings and company secretary appointments, as well as more to do when it comes to submitting your tax return.
  • Tax is more complex: The tax regime for limited companies is more intricate, demanding professional expertise for efficient management.
  • Higher costs: Establishing and maintaining a limited company involves higher initial and ongoing costs.

What Accounts Do Sole Traders Need & Do sole traders have to do a tax return?

Sole traders need a basic set of accounts, including an income statement and a balance sheet. These documents provide a snapshot of the business’s financial health.

It is your responsibility to inform HMRC that you have started to trade and to file a tax return under self-assessment.

You are also responsible for:

  • Paying Income Tax on your profits and National Insurance contributions
  • Registering for VAT if your turnover reaches the VAT threshold
  • Sending a self-assessment tax return every year
  • Keeping records of contracts, sales, incomings, outgoings and expenses
  • Keep track and make payment of any bills for services you need to buy for your business
  • Registering with the Construction Industry Scheme (CIS) if you’re a contractor or sub-contractor in the construction industry.

What Bank Account Do I Need as a Sole Trader?

As a sole trader, you’re not legally required to have a business bank account and you can use your personal bank account for all business transactions if you wish to do so. However, many choose to keep this separate and set up a dedicated business bank account for any incomings and outgoings for their business.

It simplifies accounting and helps you to keep on top of everything, ensuring your compliance with HMRC guidelines.

A dedicated business bank account through Mettle could be the right way to go.

Do I Need an Accountant as a Sole Trader?

It’s not a legal requirement to have an accountant, whether you’re a sole trader or if you’ve set up a limited company. You can do your accounts yourself or you can have someone sort your finances in-house, however a professional accountancy firm can provide expertise and advice that you wouldn’t get elsewhere.

It can also save you a lot of time, money and headaches down the line, by ensuring compliance and helping you optimise your tax efficiency.

Lots of sole traders appoint Gorilla because they found they were spending much too long balancing the books, which was taking away from the time they needed to spend on building their business.

Getting an accountant to take care of your accounts and your tax return is a good idea for many reasons. Not only will it ensure that it is submitted before the deadline and the correct way, but it will also make sure that there are no issues or mistakes made.

What Records Do I Need To Keep as a Sole Trader?

As a sole trader, you need to keep a record of:

  • Sales and income
  • Business expenses
  • VAT records if you’re registered for VAT
  • PAYE records if you employ people
  • Your personal income

These records will help you work out any profit or loss for your tax return. When you appoint an accountant, they can help you with this. When signing up to Gorilla, you can use FreeAgent as part of your monthly fee. You can both access your records within FreeAgent anywhere at any time, as it is a cloud-based solution compliant with Making Tax Digital.

Signing up to Gorilla Accounting

Choosing between sole trader accounts and limited company accounts is a pivotal decision for any entrepreneur and if you’re unsure which route to take, Gorilla can help you make that choice.

Each option comes with its own set of advantages and challenges, but understanding this and seeking professional advice to address your questions can help you navigate the complexities of business finance.

Whether you’re new to being self-employed or you’re ready to take your business to the next level with the help of an accountant, get in touch with us by calling 0330 024 0406 or request a call back today.