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Leer más →Sole trader or limited company? How to think through the decision
There's no single answer. It depends on how much you bill, how much risk you take on and where you want your company to go. Here's how I'd think about it before talking to an accountant.
"Is it better to be self-employed or set up a limited company?"
It's one of the most-searched questions for anyone starting out. And the honest answer is: it depends.
I'm not a tax adviser, rules vary by country, and every case is different. But I can share how to think it through, so you reach your accountant with the right questions.
The core difference
As a sole trader, you and your business are the same thing legally. What the business earns, you earn. What the business owes, you owe.
With a limited company, the company is a separate legal entity. It has its own assets, its own accounts and, in general, your liability is limited to what you've put in.
When being self-employed usually fits
- When you're starting out and don't yet know if the business will work.
- When you bill little, or irregularly.
- When your activity carries low risk.
- When you want maximum administrative simplicity.
When a limited company usually fits
- When turnover grows and tax starts to weigh.
- When your activity carries risk and you want to separate your personal assets.
- When there are partners and ownership needs to be split clearly.
- When you want the company to have a life of its own, beyond you.
What we did
We started as self-employed. It was the simplest option and we didn't know whether it would work.
Then we moved to a partnership and, later, to a limited company. Each step when it made sense, not before.
Each change was mostly paperwork. But it was also admitting that this was no longer something temporary.
Your legal structure doesn't make the company. But it says a lot about what you want it to become.
The questions I'd ask myself
- How much do I expect to bill this year and next?
- How risky is my activity? What would happen if something went wrong?
- Will I have partners?
- Do I want the company to be able to run without me one day?
- What does running each option cost? A company comes with more obligations.
What I would say
Don't decide on tax alone. Or because it's what everyone does.
Start simple if you can. Change when the company calls for it. And talk to a good accountant: it's one of the investments that pays for itself fastest.
P.S. On deciding what you want your company to be: write down what it should become before you sign anything.