Sole trader, limited company, you’ve heard me talking about them.
They’re your legal structure and the foundation of your business.
What are they, what do they mean and which are you (and why it matters that you know).
What Is A Sole Trader?
A sole trader is a person who is trading and isn’t a separate legal entity.
Are you doing any activity that shows you want work (e.g. advertising, social media account, looking for clients, taken on clients, website) with the aim of making money (profit)?
Whether you’ve made any money isn’t the point. It’s whether you are doing business activities to get money.
- Do you have a Twitter account for your business? You’re probably trading.
- Do you have a website? You’re probably trading.
- If you charge for your services, you’re trading.
Profit is what makes a difference from a cake making business and someone baking for the church fete.
What is a separate legal entity? Good question. Read on 🙂
What Is A Limited Company?
A sole trader isn’t different in law to you, the individual person. This is different for limited companies (short for ‘limited liability company’).
The word company is often used interchangeably with business (even HMRC do it). Your business is only a company if your business is a registered limited company.
- A company is a business registered with Companies House
- The limited part means limited liability. That means the people who are directors (can be one person or several) aren’t personally liable if the company loses money or goes bankrupt
To learn more about demystifying limited companies, have a look at the course and retreat.
What’s a separate legal entity?
The company is a separate legal entity on its own. It’s separate to you as an individual person (that’s where you get the legal protection from) (learn more).
A sole trader IS the business.
Learn more: how to decide if a limited company is the right option for you.
(If you’ve been googling and got confused, it’s probably not you. There are a lot of businesses with a wide range of needs and it’s often not clear when information is presented which audience it’s intended for.
Some companies aren’t for profit, for example, property holding companies. It gets even more confusing with not-for-profit companies who trade and companies-not-for-profit except legally they are for profit. This is why talking to someone you trust before you start a company is so important.)
What Does This Mean For Me?
To be a limited company, you, or someone else on your behalf, must have set your business up as a limited company. Check here on the Companies House website.
You are probably a sole trader as that is the default option.
Learn more about starting a business as a freelancer.
All sole traders need to do an annual self assessment tax return and keep good records (learn more).
You can download my free deadline planner to help you.
What Do I Do If I Have A Limited Company?
You have more accounting requirements as a limited company so it is very important to meet these. There are multiple returns and deadlines instead of one.
- Companies House return
- Companies House accounts
- Business accounts
- HMRC accounts
- Corporation tax return
- Probably PAYE too
- (and a bunch of other paperwork)
You can download my free deadline planner to keep track 🙂
I Haven’t Made Any Money Yet
Yes, you can still be a business. If you are trading, whether you have had an income or not isn’t the point, you’re still wanting to. You’re trading.
You need to tell HMRC and register as a sole trader.
If you’ve started a limited company, the accounts etc will still be due.
A lot of people don’t realise this, so don’t let that person be you 😉
Most of all –
Are you a sole trader or limited company? Do you understand what you need to do?
If you need one to one support deciding whether limited company or sole trader is right for you, get in touch.
If a retreat or a course is more your thing, learn more about the Demystify Limited Companies retreat and course.
If you need an at-your-own-pace tax return course that’s easy to understand, have a look at How To Do Your Own Tax Return.