Thinking of Leaving Teaching?

Going Self-Employed – Setting Up Your Own Business

When I decided to leave teaching, I thought about setting up my own business. The first question I needed answering was, “Should I set myself up as a Sole Trader or Limited Company?” Here is a brief summary of the two:

Sole Trader

The term ‘sole trader’ relates to the way in which a business pays tax and national insurance. There is technically no legal distinction between a sole trader and their business. All of the business’ profits are classed as the sole trader’s personal income. Sole traders account for 60% of small businesses in the UK. A sole trader legal structure is the easiest to set up and that’s why it is such a popular option.

A sole trader must register with HM Revenue and Customs (HMRC) (there’s a fine for not doing this) and must inform HMRC about any income received via a Self Assessment form, which is the system used to collect Income Tax.

Advantages of being a Sole Trader

  • You are under no obligation to file any of the accounts that a limited company owner has to.
  • You’re your own boss

Disadvantages of being a Sole Trader

  • In the eyes of the law, you and your business are the same and, without insurance, you could be sued personally.
  • you are liable for your business debts, which can put your personal finances and assets at risk.
  • It is not as tax-efficient as being a limited company.
  • Having to be a Jack of all trades

Limited Company

One of the main benefits of having a limited company instead of setting up as a sole trader is that with a limited company you have limited liability. As a sole trader, if you have business debts or your business goes bust then your personal finances and assets are in danger.

Advantages of being a Limited Company

  • As a limited company, your personal finances and assets are protected if there are problems with your business finances.
  • You will pay less personal tax than a sole trader.
  • There can be a perception that a limited company has a more professional image than a sole trader. Larger companies may prefer to deal with only limited companies.

Disadvantage of being a Limited Company

  • The main disadvantage of choosing the limited company route rather than becoming a sole trader is that you have to prepare annual accounts if you’re a limited company owner. You need to make sure that you use a limited company accountant to ensure that your accounts are thorough, and these need to be filed with the Companies House. You will also need to file a full corporation tax accounts for the HMRC.

Further information:

Startups – Everything you need to know about setting up your own business. What to start (business ideas), how to do it (naming the company, branding, marketing, etc.) and other help topics.

Crunch – Changing from sole trader to limited company.

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