One of the first questions any new personal trainer must ask is whether to work as a sole trader or trade through their own limited company. Whatever route works best for you, failing to follow the rules and deadlines set out by Her Majesty’s Revenue & Customs (HMRC) can be an expensive mistake. So make sure you really understand what your responsibilities are.
Everyone’s situation is different and what’s right for one person might not be right for another and there are many other factors that might influence your decision:
- What you’re expected turnover is and how much profit you make,
- Your future plans to grow the business and in particular employ people,
- What level of commercial risk you will be exposed to,
- Reducing your tax bill against the extra time working on administration.
What about the Pros and Cons?
As with all major business decisions, there are advantages and disadvantages to each option:
Sole trader / self employed – an easy way to start in business
- Simple and straightforward to set up, with no initial costs,
- Less paperwork with no annual accounts, company tax or corporation tax,
- Lower ongoing costs,
- Less government departments to liaise with – a single tax return once a year,
- The usual route most people take when just starting out,
- Higher personal risk – you will be personally responsible for the company’s debts, so your personal assets can be at risk,
- Less opportunities for effective and efficient tax planning.
Limited company – a bit more complicated, but essential for some.
- More costly starting up as you will have to pay to form a Limited Company,
- You have to file your accounts at Companies House each year, which will be on public record,
- You also have to file accounts, company tax and corporation tax calculations with HM Revenue and Customs every year,
- Accountancy fees are generally more expensive,
- Some larger corporate clients, may only work with other limited companies,
- You are separate from the company, so your personal possessions may not be at risk, unlike if you’re self employed,
- You may appear to be a little more professional to potential clients,
- Better tax planning opportunities and hence potential for greater profit.
So, which one is best?
Whilst there are a whole bunch of financial benefits to going ‘Limited’, many small businesses, particularly start ups, choose the sole trader option. This is primarily because although going limited might be more financially rewarding, with lower taxes and more tax planning opportunities, there will be far more administration and legal commitments by going limited.
If you are just starting out for the first time and need something simple and easy to start and operate, then the sole trader route would be good for you. Once your business grows, you can always incorporate it into a limited company down the line.
If on the other hand you have already established a brand and are now looking to expand the business further, then a Limited Company may be better. In some instances it may be beneficial to operate as a Limited Company from the start.
So, there are lots of things to think about, but most important of all is your own personal preference. You might want the simplicity of being a sole trader rather than a limited company, or you might prefer the security of having ‘limited liability’. In order to make that decision you must have all the information at your fingertips, so you should continue to do your homework and take the chance to speak to an expert.