“I am a freelance consultant trading as a sole trader and am considering setting up a limited company. I understand the tax and national insurance savings but what are the key non-tax differences with a limited company and what will my obligations be? For example I don’t understand the difference between a director and a shareholder”



UPDATE MARCH 2016 : we have written a new article for the 16/17 tax year comparing sole traders to limited companies – Sole Trader vs Limited Company 2016/17

There are a number of major non-tax differences between trading as a limited company as opposed to a sole-trader. Perhaps the key difference is limited liability status – your personal assets are protected by trading through a limited company (assuming you haven’t signed any personal guarantees). You will have duties as a director, but as long as you have adhered to these duties then if the business fails you should not be held personally liable.

Whilst trading as a limited company you will have extra reporting duties as limited company accounts and annual returns will need to be filed with companies house along with a corporation tax return and a full set of accounts with HMRC. Whilst small company criteria are met the accounts actually filed with companies house, and therefore on public record, will be abbreviated and as such will offer little information to the public other than amounts owed to and from the company along with the number of shares and cash or bank balances at the year-end date. With regards to the annual return this is basically a statement each year of the registered address of the business and details of the directors, shareholders and where applicable a company secretary.

You will need to setup a bank account in the name of the business – remember the company is a separate legal entity to you personally, unlike when you are a sole trader.

You may also find that the perception of your business is enhanced. Rightly or wrongly, potential lenders, customers or suppliers may consider your business to be more established when trading as a limited company. As a limited company you will also have the option to allot shares to any outside investor in exchange for a stake in your company.

The difference between directors and shareholders is that directors are in charge of the day-to-day running of the business whereas the shareholders own the business. As such controlling shareholders can vote to remove a director at any time. There is no requirement for a director to be a shareholder in law.

As a director your key responsibilities are the following:

  • try to make the company a success, using your skills, experience and judgment
  • follow the company’s rules, as set when setting up the company (known as the articles of association)
  • make decisions for the benefit of the company, not yourself
  • tell other shareholders if you might personally benefit from a transaction the company makes
  • keep company records and report changes to Companies House and HM Revenue and Customs (HMRC)
  • make sure the company’s accounts are a ‘true and fair view’ of the business’ finances

It is very important when running a limited company to have a good book-keeping system in place to help you keep on top of the companies finances. Internet based systems such as FreeAgent make this a breeze.

Some key drawbacks of a limited company are:

  • Cost – whilst it is relatively straightforward to set up a limited company the administration and accounting costs are higher than that of being self-employed. However the savings on taxation usually outweigh the additional cost.
  • Flexibility – when you are a sole trader you are able to apportion a mix of personal and business costs on some of your expenses for example you may charge a percentage of your phone bill to the business but when you are a limited company there is not as much flexibility, generally a cost must be incurred wholly and exclusively for business purposes.
  • Interest – one of the benefits of being a sole trader is that you have the ability of earning much higher interest on your businesses cash balances. These days interest rates on company savings accounts are very low, whereas as an individual you can use any savings account available, including a tax free ISA.