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Sole Trader or Limited Company? – What Therapists Need to Know

I’ve been in private practice for over seven years now. Throughout that time, I’ve been a sole trader. I initially chose this option because it was an easy, stress-free way to establish my business, but this year I’ll become a limited company. Making the switch feels like a scary step, but with support from my trusted accountant, I’ve decided to take the plunge. I thought I’d share my reasoning with you as I know it can be confusing. So, sole trader or limited company – which option is right for you?

Sole Trader or Limited Company – What’s the Difference?

A sole trader, also known as a sole proprietorship, is a simple business structure in which one individual runs and owns the entire business. A sole trader is entitled to keep all profits after taxes have been deducted but is also liable for all losses the business incurs.

In contrast, having ‘limited liability’ status means the company is an entity in its own right. Its owners are legally responsible for its debts only to the extent of the money they invested.

Sole Trader – The Pros & Cons

When you’re a sole trader, you are your business. It’s really easy to set yourself up as self-employed and start-up costs are low. You keep all the profits and benefit from maximum privacy. If circumstances change, adjusting your legal structure or winding up your business completely is relatively simple and straightforward.

There are some potential disadvantages. Operating as a sole trader means you have personal liability for any losses the business incurs. There are tax planning limitations, and it can be hard to generate finance opportunities. There’s also a perceived lack of prestige and some customers prefer not to deal with sole traders.

Limited Company – The Pros & Cons

Running your business as a limited company provides the potential for more profitability. Unlike sole traders who pay 20%-45% income tax, limited companies pay 19% corporation tax, so they tend to be more tax-efficient. They qualify for a wider range of allowances and tax-deductible expenses and can generate more investment and lending opportunities.

Limited company status also offers limited liability protection. Simply put, should your company run into trouble, your personal assets will be secure. This is because a limited company is treated as a separate legal entity – a legal ‘person’ in its own right. In many ways, being a director of a limited company has greater professional status than sole trader. This can lead to increased credibility and trust.

However, there are some downsides too. You’ll encounter more financial admin and face more rigid taxation rules. Directors of limited companies have certain legal obligations, and you’ll also have less privacy than a sole trader.

Why I’m Making the Switch

You might be wondering why, after seven years of everything going so well, I’ve decided to make the switch and become a limited company. The simple answer is I’m following the advice of my accountant! When we met for my annual business review, it soon became apparent moving to a limited company would be better.

My business has grown. Alongside my therapy practice, I rent clinical rooms to other practitioners. As a result, my income has increased to a point where it’s more tax-efficient to be a limited company. It’s also time to change my car and having a business lease makes financial sense for me. Finally, my new status is more aligned with the direction in which my business is heading. I’m doing more corporate workshops and lots of companies want to work with other limited companies.

What’s Right for You?

Choosing to be a sole trader or limited company is an individual decision based on where you are and how you want your business to look going forward. In either scenario, I’d advise working with an accountant you can trust so they can provide expert advice and guide you in the right direction.

Useful Links

Setting Up in Private Practice

Getting Started in Private Practice Guide

What Does it Mean to be a ‘Limited’ Company?

How to Keep Your Private Practice GDPR Compliant

Therapist Websites

How Much Should I Charge For Therapy

 

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