Sole Trader or Limited Company? Which Suits Your Beauty Business Best?

Opening or changing your business structure can be daunting. With over 57% of the hairdressing industry acting freelance according to a survey conducted by the NHBF, the question is - is freelance suitable for you?

What is a sole trader?

A sole trader is essentially a self-employed person who is the sole owner of their business. It’s the simplest business structure out there - which is probably why it’s the most popular – and you can set up as one via the GOV.UK website. You need to fill out a Self Assessment Tax Return yearly by 31st January (online).

You need to set up as a sole trader if any of the following apply:

- you earned more than £1,000 from self-employment between 6 April 2020 and 5 April 2021

- you need to prove you’re self-employed you want to make voluntary Class 2 National Insurance payments

Pros and Cons

+ Easy to set up.

+ Very little paperwork apart from an annual self-assessment tax return.

+ Greater privacy than incorporated businesses, whose details can be found via Companies House.

- Sole traders have unlimited liability, as they’re not viewed as a separate entity by UK law. This means that if the business gets into debt, the business owner is personally liable.

- Banks prefer limited companies, which means raising funds is tricky and it's harder to receive business loans.

- Tax rates as a sole trader can be higher after a certain threshold, after a certain level of earnings, it may be more lucrative to become a limited company.

What is a Limited Company?

A limited company is a type of business structure that has its own legal identity, separate from its owners (shareholders) and its managers (directors). This remains the case even if it’s run by just one person, acting as shareholder and director.

Filing Requirements:

- Annual accounts (Companies House & HMRC)

- Confirmation Statement (Companies House)

- Corporation Tax Return (HMRC)

- VAT Returns (If turnover exceeds VAT threshold, different schemes available)

- Employer (PAYE) Returns (if the company is paying wages)

- Event-based filings (i.e. changes to company details or structure).

Pros and Cons

+ Incorporation forms a legal distinction between the business owner and their business. This means the company has the benefit of limited liability.

+ Paying Corporation Tax on profits offers a kinder tax rate than Income Tax.

+ Limited companies have a wider range of allowances and tax-deductible costs.

+ Banks are happier to offer funding to incorporated businesses.

- Greater fiduciary responsibilities; filing accounts and tax returns can be time-consuming and costly if you hire someone else to do this for you. Late filing results in large fines.

- Small fees i.e. incorporation fee, change of name fee,

- Companies are required to show company information publically - such as details on directors and the company's earnings, address. This transparency may not appeal to all.

Conclusion

One of the most common methods is to begin your business journey as a sole trader. Once your business develops and starts getting larger turnovers and profits, you can re-evaluate what is best for you next - this might be, incorporating a company.

Being a sole trader is a great first step - but becoming an incorporated business is not as daunting as it might seem! There are lots of services, subscriptions and help that can ease the responsibilities of being a company director.