Sole trader or company: what's best?

JB writes: I have taken early retirement and am looking to provide consultancy services to large businessestaking on work in the form of fixed price contracts. What issues should I consider when I am choosing whether to operate as a sole trader or through a company?

Answer

The main factors to take into account are the commercial ones inherent in the business relationship and services you will provide, writes Jon Sutcliffe, partner at Kingston Smith.
If there are commercial risks, it makes good sense to use a limited-liability company or partnership. This can protect you personally from risks, such as being sued by a client or being exposed to claims from suppliers.

The companies you work for may insist that you operate through a limited company, because of the IR35 legislation, which covers the taxation of contractors. In this way any additional tax burden would fall on you rather than them. You should make sure that you understand your tax position on each assignment when you agree its terms.

Companies with limited liability and partnerships generally have a greater administrative burden and the accounts are on public record, filed at Companies House. Should you need trade credit, or to raise finance, then this can be obtained without making you personally liable.

In addition to the commercial issues, you should consider the tax benefits of using a company. Generally if you are making a profit, you will incur a lower tax charge by operating through a company. However, if you believe you will initially make a loss, it might be worth starting as a sole trader so you can offset the losses against your other income. You should take tax advice based on your wider circumstances.