Sole Traders vs. Limited Companies

By Dr Qian Xu / 22 Jun 2018

Dr Qian Xu discusses the differences between setting up your business as a sole trader or a limited company

In my experience, I have found that most aesthetic practitioners have very limited business and accounting knowledge when they first start their aesthetic journey. I certainly don’t remember any lectures 
on these topics in medical school. After attending an injectables foundation day, students often leave the training room full of excitement; however, as soon as they arrive home, their minds are filled with hundreds of questions about how they actually get started. I often carry out one-to-one clinical mentoring sessions as part of an aesthetics injectables Level 7 qualification course, and one of the things I get asked a lot by my students is, ‘When should I consider changing to a limited company?’. 

As there is a lot of information out there on this topic, it can be overwhelming for those who are not entirely familiar with it. In this article, I have summarised all of the important points that I believe are essential for aesthetic practitioners to know when they are starting their business.

From employee to self-employed

The majority of aesthetic practitioners would have come from a National Health Service (NHS) background and as an employee of the NHS, you would be on the payroll and receive a monthly salary. If you have a look at your payslip, you will notice that the amount you receive in your bank account is only about 60-70% of your gross or total pay. This is because the income tax, national insurance, pension contributions, and any student loans are all taken by your employer and paid for you on your behalf. So as an employee, you work and you get paid; it’s pretty hassle-free. This changes when you start your own business in aesthetics as you become self- employed; among your responsibilities you will be sorting out your own, and possibly your employees’ taxes. Being self-employed can be in one of three forms: sole trader, limited company and partnership.1 The latter is rarely seen in the world of aesthetics in my experience, therefore, I will focus on sole trader and limited company.

The sole trader

The simplest way to start your business is to operate as a sole trader. Sole trader simply means that you receive payments directly from customers for your products or services, as opposed to being paid by an employer. If you want to operate as a sole trader, you just need to declare to Her Majesty’s Revenue & Customs (HMRC) as self-employed.Being a sole trader means that there is no distinction between you and your business. You don’t need a separate bank account or an accountant, so maintenance costs are relatively low. However, it is a good idea to keep track of your business sales and expenses on a spreadsheet, because you will need to file this information with the self-assessment tax return every year, and then pay the amount of tax that is due.3 

The self- assessment can be led online and is fairly straightforward.4 I would say that the main advantage of doing this is that it is low cost and low maintenance. When you are first starting, you may only have a few patients every couple of months, so it doesn’t make sense to pay for an accountant. Furthermore, you may be practising aesthetics alongside a part-time or even a full-time NHS job, so it’s unlikely that you will build your patient base very quickly. The sole trader route can give you more flexibility, especially if you just want to ‘test the waters’ and see if aesthetics is something you want to do long-term. So if it’s so easy being a sole trader, why do so many practitioners form limited companies? Can you keep trading as a sole trader forever?

The limited company

Let’s start by understanding what a limited company actually is. It is a legal entity that 
is completely separate from your personal affairs.5 As a sole trader, if your business went into debt, you would be personally liable to repay the debt, so in theory, you could lose your house. As a limited company, any debts are limited to the company, so your personal assets are protected. A limited company is owned by its shareholders and is run by its officers. An officer is simply someone who is appointed to take a particular role in the company. In your case, you can appoint yourself to be the director of your company, and allocate 100% of the company’s shares
to yourself. 

Alternatively, if you have business partners, you can have more than one company director, and you can decide how to split the shares. Your limited company would have its own bank account, so business transactions are separate from your personal ones. It is registered with Companies House, which is a government organisation that incorporates and dissolves limited companies, and makes company information available to the public.6 Every year, you are required to submit a confirmation statement to update them on your address, company officers and shareholder information. In addition to that, you will need an accountant to help you submit annual accounts to Companies House and HMRC.7 If you know what you are doing, it is possible to do this yourself, however, if you miss a deadline or get something wrong, you could be penalised for it later. 
There are many advantages to having a limited company. As well as protecting your personal assets, a limited company looks more professional and will instantly add
some credibility to your business. However, the most important reason that independent practitioners choose to form a limited company is the tax advantages that it can bring.

Be more tax efficient

In order to understand why a limited company can be more tax efficient, you must first understand how tax is applied to sole traders and limited companies. When you are a sole trader, your business income is treated the same as way as your personal income, and therefore you have to pay national insurance contributions (NIC) as well as income tax. If your annual income is over £45,000, then you will have to pay 40% tax on the amount you earn, which is applied to all of your income.8 With a limited company, your company would need to pay a 19% corporation tax 
on the profit it makes.8 After the tax is paid, the net profit can be taken out as a dividend (an amount of the net profit typically paid to shareholders annually) or be kept in the company. 

Your gross profit is the turnover minus the expenses. Any expenses related to the business can be claimed as a business expense, such as aesthetics training courses, networking or travelling to and from business meetings. It is common practise for a director to take out a salary which is equal to the personal allowance. This is the tax-free income allowance set by the government, which is currently £11,850 per year. If your salary is less than the personal allowance, then you do not need to pay the NIC. If you were to do this, you would then take out dividends to top up your income. The tax on dividends is a bit lower than on your normal income.8 So this is a very tax-efficient way to draw your income. If you don’t need so much money, you can just leave the money in the company. You will only pay tax on it if you want to draw it out as dividend. 


Another benefit of a limited company compared to a sole trader is that any losses can be carried over to the next financial year to offset the profit in the following year.9 This is really useful because in the first couple of years, you are likely to be spending much more than you will be bringing in. In terms 
of planning for the future, your company can contribute towards your pensions, you can sell your shares to others (e.g. family members), and you can employ other people. So if you have big plans about opening your own clinic one day, it might be worth forming a limited company sooner rather than later.

Incorporate a limited company

Before incorporating a limited company, it is always a good idea to speak to an accountant to make sure it is appropriate for your situation. If you are going to go ahead with it, then you can either go through Companies House directly,6 or use a third-party company formations website to help you through the process. The registered address of 
the company is public information, and is searchable from Companies House. If you do not want to use your home address for this, you can pay for a service address and set up mail forwarding to your home address. The service address will be the official address where HMRC and Companies House will send letters to.10 It’s also worth thinking about who you want the shareholders to be. You might want to give some shares to your spouse, for example, if they are unemployed or in a low income bracket because you can make use of their personal allowance and maximise your household income.11 If you want to do this, it’s much easier to do it while you are forming the company.

VAT

Value-added tax is currently 20% of the
price of your product or service, and you
are required to become VAT-registered and pay this to the HMRC if your annual turnover exceeds £85,000, unless you are only offering VAT-exempt services. You can be VAT-registered as a sole trader or a limited company.12 
The HMRC states, ‘We will generally accept that cosmetic services are exempt where they are undertaken as an element of a healthcare treatment programme. Where services are undertaken purely for cosmetic reasons, they will be standard rated’.12 This is a grey area with no clear guidance that needs further clarification. But I have found that the current general consensus is that 
the cosmetic procedures are performed to improve the psychological well-being of our patients, and therefore counts as a medical intervention, thus would be VAT-exempt. However, there may be other reasons why you might want to register for VAT,13 so it would be a good idea to have a discussion with your accountant.

Conclusion

Personally, I have been through all the stages of the business myself, and know how overwhelming it can be. There are a number of organisations and communities out there that can advise you on what is right for you. Most training academies have their own Facebook groups, which tend to be useful for clinical discussions. I have also created a closed Facebook group open to all aesthetic practitioners from a healthcare background, the Aesthetics Practitioners Community to o er support and guidance on all aspects of the aesthetics business. There are pros and cons to both working as sole trader 
and limited company. In my opinion, the deciding factor should be how serious and sure you are about going into and staying in the aesthetics business. If you have no doubts about it, then I would form a limited company from the beginning. It looks a lot more professional, and it’s good to get into good habits early. If you have just done an injectables foundation course, then the legal structures of your business shouldn’t be your first concern and going down the sole trader route is absolutely fine, this also works well if you are currently employed too. 

References

1. Gov.uk, Working For Yourself <https://www.gov.uk/working-for- yourself>

2. Gov.uk, Set Up a Sole Trader <https://www.gov.uk/set-up-sole- trader>

3. Gov.uk, Self Assessment Tax Returns <https://www.gov.uk/self- assessment-tax-returns>

4. Bytestart.co.uk, Sole Trader Tax – A Guide for start-ups and the newly self employed <http://www.bytestart.co.uk/sole-trader- tax-guide.html>

5. Gov.uk, Set up a Private Limited Company <https://www.gov.uk/ limited-company-formation>

6. Gov.uk, Companies House <https://www.gov.uk/government/ organisations/companies-house>

7. Gov.uk, Running a Limited Company <https://www.gov.uk/ running-a-limited-company>

8. Contractorcalculator.co.uk, Contractor tax: limited company and personal taxes explained <https://www.contractorcalculator. co.uk/limited_company_personal_taxes.aspx>

9. Taxation.co.uk, Loss relief options available to business <https:// www.taxation.co.uk/Articles/2017/07/18/336697/loss-relief- options-available-business>

10. Your Company Formations, The di erence between a service address and a registered o ce address <https://www.yourcompanyformations.co.uk/blog/the-di erence-between-a- service-address-and-a-registered-office-address>

11. Contractorcalculator.co.uk, Contractor guide to splitting dividends <https://www.contractorcalculator.co.uk/contractor_ guide_splitting_dividends.aspx>

12. Gov.uk,VATNotice701/57:healthprofessionalsand pharmaceutical products <https://www.gov.uk/government/ publications/vat-notice-70157-health-professionals-and- pharmaceutical-products/vat-notice-70157-health-professionals- and-pharmaceutical-products>

13. Gov.uk, VAT Registration <https://www.gov.uk/vat-registration>

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