Wondering whether you can operate as a sole trader whilst also running a limited company is a common question, and there are a few reasons why you might want to do this. But, are you actually allowed to?
Basically, yes – you can run a limited company and be a sole trader at the same time. What is crucial though, is that as well as keeping your personal and business finances separate, you’re really careful to keep the two businesses totally separate. That means two separate entities, not one business that’s been split in two.
That’s not just us being precious about the bookkeeping either, there are actually several very good reasons for keeping a clear divide between your business, including the lurking presence of HMRC.
We’ve prepared this guide to give you an idea of the basics, but it might also be worth chatting to your accountant about your business structure.
Making it clear that you’re not ‘artificially separating’ your businesses for VAT purposes
When a business approaches the VAT registration threshold (which means that turnover is getting near the magic £90,000 mark), it’s required to register for VAT.
Sole traders with multiple businesses work out their turnover for VAT on the basis of all their sole trader incomes combined, because there’s no legal separation between a sole trader and their business. Limited companies are an entity in their own right, so they work out their turnover for VAT separately.
Some business owners might feel tempted to split their business up, thus dividing the turnover, and therefore getting rid of the need to register for VAT. Don’t do it.
Avoiding tax avoidance!
If HMRC get even the slightest whiff that you’re trying to avoid VAT by splitting two businesses in order to stay below the VAT threshold, they’ll be all over you like a rash. This is particularly the case where both businesses are in similar industries.
Recording finances and claiming expenses correctly
On a very practical level – you need to make sure that any expenses you claim (bills, travel costs, broadband etc) are attributed to the right business. You could end up with one heck of an accounting headache otherwise!
For example, say you were to claim all your travel expenses through your sole trader business but use it for your limited company work half the time. HMRC could then disallow half the costs you’d claimed, and hit you with a bill for the additional tax – plus penalties.
Be clear what work each business does
In keeping the businesses separate, make sure you’re really clear what work was carried out by which business.
Perhaps all current clients will go through your sole trader business and from now on new ones will go through the limited company. Or maybe you’re a limited company providing kitchen worktops, and a sole trader who does photography.
Unless you clearly document your invoices, including making it clear which business they belong to, HMRC might decide it’s time for an audit.
Should I switch from being a sole trader to a limited company?
The only way to answer this question is to weigh up the pros and cons of being a sole trader versus incorporating the business to become a limited company.
The way you run your business, its turnover, and your personal circumstances, will all be major factors in deciding how to structure your business. You might also find it useful to chat to an accountant about choosing the most appropriate business structure first.
Operating as a limited company
When it comes to setting up as a limited company there are some distinct advantages and disadvantages to think about. One of the most common considerations is around the idea of risk.
Risk
Some businesses are more financially risky than others, so it might make more sense to register as a company because this limits the extent to which you’re personally liable for business’s debts. If the company goes belly up, you won’t start losing personal assets beyond anything you’ve already put into the company.
Tax efficiency
Depending on the level of turnover, and how you pay yourself from the business, it can sometimes be more tax efficient to operate as a company.
As a director and shareholder you can choose to pay yourself in dividends as well as a salary. The great thing about dividends is their lower tax rate, their exemption from National Insurance, and an additional dividend allowance on top of your personal tax allowance.
It all depends on what else you have going on though, so again – it’s well worth talking to your accountant!
Protecting a name
Registering a limited company is quite a formal process, and the company name must be unique. Once registered, no one else can use it so this can help protect your company’s name as a brand. The only way a sole trader can do a similar thing is if they trademark their name.
Operating as a sole trader
Some people see being a sole trader as a more attractive option because it’s simpler and faster to register the business with HMRC.
Admin
There’s also very little paperwork in setting up as a sole trader. Whereas company directors need to think about the Company Tax Return as well as their own Self Assessment, along with submitting annual accounts.
The main thing you need to do as a sole trader is your Self Assessment tax return.
Paying yourself
You won’t need a PAYE scheme to pay yourself a director’s salary, or a separate business bank account, or to go through the official process of issuing and recording dividends. As a sole trader, you can keep all your own post-tax profits yourself.
Privacy
The details of every limited company, its directors, and the people with significant control of it, must all be recorded publicly on the Companies House website. Sole traders don’t have to do this, so operating in this way can give you a little more privacy.
Liability
The downside of working as a sole trader is that you and your business are legally one and the same. That is to say, you’re personally liable for any business loans and debts the business runs up if things go pear shaped.
Your own assets, like your house, car, or any cash savings, are also at stake. That’s why being a limited company is such a draw because you quite literally have limited liability.
Funding
It’s also often more difficult to raise funding and gain investment as a sole trader, which can make growing your business tricky. Lenders – especially banks – tend to see limited liability companies as less risky and often shy away from sole traders.
Choosing the structure that’s best for your business
If there are very strong reasons for separating different business ventures (and you truly keep them separate) this is generally acceptable. Just remember that HMRC will be on the lookout for businesses who deliberately cherry-pick the best bits from each structure in order to avoid tax.
There are pros and cons to being a sole trader and for limited companies, so do your research, and don’t be afraid to ask questions!
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