With the recent increase in dividend taxation, many of our clients are asking whether it still makes sense to incorporate when you are a Sole Trader. It's a tough question to answer as indeed, the tax benefits of running a business as a Limited Company have now been seriously curtailed. If you extract all of the profits from your company as they arise, the total tax and national insurance (NI) paid is now almost identical whether your are operating as a Limited Company or a Sole Trader.
There are still a number of benefits however to operate as a Limited Company. Here they are:
1. Better legal protection
As the name suggests, if you run a Limited Company, you are protected in case things go wrong. Assuming no fraud has taken place, you will not be personally liable for any financial losses made by your Limited Company. Those running a business as self employed do not enjoy such protection from financial claims if things go wrong with their business. While it's possible (and recommended) to subscribe to a professional liability insurance, there is always a risk of running foul of the fine print...
2. More professional image or status
In some industries, having a Limited Company can provide a more professional image. If you are doing business with larger companies, you may find that they prefer to deal only with Limited Companies rather than Sole Traders or even partnerships. Indeed by being transparent, adhering to regulatory requirements and opening up company accounts to public scrutiny, you are demonstrating that the business is being correctly managed and this inspires confidence.
3. Wider availability of some contracts
The reason bigger corporations do not hire Sole Traders is not just image or professionalism but IR35 risk. The IR35 regulation was put in place to prevent employees to set up shop as free-lancers just to save tax. In other words if HMRC decides that a free-lancer behaves as an employee, then he is required to pay the same amount of tax and NI as an employee would. He he does not, whoever hired him is responsible for the back tax and NI, unless he operates as limited company (and in which case that limited company is responsible). It's easy to understand then why some organisations will only deal with limited companies!
4. Name protection
Once you register your company with Companies House, your company name is protected by law. No-one else can use the same name as you, or anything deemed to be too similar. As a Sole Trader, you can use a trading name but it's not protected and there is nothing to prevent a competitor to start using the same trading name as you. While it's possible to protect a trading name with a trademark, it will be in practice a lot more expensive than just creating a company with that name.