When your sole trader IT business deserves to be a tech limited company
If you operate as a sole trader you’re certainly not alone. In 2022, there were 3.1m sole traders in the UK making up 56% of the business population.
Most of these sole trader businesses do not employ anyone aside from the owner. So the simplicity of being a sole trader makes it an appealing way to work, whatever your sector, writes Harry Gruffydd, limited company operations manager at Workwell.
If you’ve been operating as a sole trader for a while you may wish to stay that way.
That said, as your business becomes more established and grows -- and let’s be honest growth for businesses in the IT, digital or technology sector can occur at a breakneck pace -- you may wish to consider setting up a limited company instead.
There are no hard-and-fast rules about when it’s most appropriate to make the switch from sole trader to limited company, it’s a purely personal decision. But it’s also a business decision!
So in this article, exclusively for Free-Work, let me look at what may trigger you to change your tech business from a sole tradership to a limited company.
Sole trader to limited company – the top three triggers
Trigger #1 - Your business is becoming more complex
If you are incurring more business expenses, possibly around travel, networking and that staple of tech businesses – equipment -- or if you are using sub-contractors to help support your clients, then you may be better off forming a limited company.
While you can still deduct expenses from your profit calculation before paying tax as a sole trader, a limited company might offer you a more streamlined way to do this.
The amount of tax you pay is worked out differently when you’re a limited company director, which means you could be better off.
It’s a good idea to get tailored advice from a specialist contractor accountancy firm, so that you can judge whether switching from sole trader to limited company will impact your take-home pay.
Trigger #2 - It could help you win new clients
Although switching to a limited company may make little difference to the way you work day-to-day, it may have an impact on how your potential clients regard you.
This is because a limited company is more involved in terms of set-up, management and compliance, so some people and businesses perceive ‘LTD’ as a signal that you’re more serious, committed and professional.
Indeed, some businesses make policy decisions only to work with limited company contractors (also known as ‘personal service company contractors’).
So switching to a limited company may make it easier to secure more lucrative work with bigger clients.
Similarly, recruitment agencies in the technology sector tend not to engage sole traders, but agencies are very familiar with engaging limited companies and sourcing them IT assignments on a contract or basis, typically for three-months.
Trigger #3 - You need to separate your finances
As a sole trader, your personal assets such as your car or house are at risk if your business runs into financial difficulty.
Conversely, with a limited company, liability is limited to the assets held by the business. So if someone needs to recover debt from you as a limited company director, your home/car will not typically be in jeopardy.
Fortunately, the risk of this is usually low for professional services contractors such as IT contractors, because they’re not investing in stock or other items which require capital outlay and/or debt.
However, everyone has different circumstances and attitudes towards these issues so if there’s a need to have greater separation between your business and personal finances, then it may be appropriate to switch from sole tradership to limited company status.
Further help in answering – ‘sole trader or limited for your computer business’?
If you’re not sure whether to remain as a sole trader or switch to a limited company, take specialist advice. A specialist contractor accountant will help you review your income and expenditure and talk to you about your future plans, all of which will help you make an informed decision about what’s right for you and your business. Good luck!
Limited Company Operations Manager at Workwell
Harry leads Workwell’s team of specialist contractor accountants. He has worked in the industry for over 15 years and is an expert in tax and compliance matters for freelancers and contractors.