Setting Up Your Interior Design Business: Sole Trader vs Limited Company

So you’re thinking about forming your own interior design business? Excellent: now is a great time to start.

With booming social media channels like Pinterest and Instagram making it easier to share engaging imagery, there is a growing interest in creating and showing wonderful, vibrant homes. What’s more, social media makes it much easier to promote your services online and reach the people who need your help.

However, while turning your creative outlet into a business is easier than ever before, there are still some important formation aspects to consider before you launch. Specifically, deciding whether to form a limited company or register as a sole trader. While this may seem like a difficult decision, we’ll take you through the different ways you can trade, and ultimately help you to decide the best option for your business.

Key Takeaways

• Deciding between registering as a sole trader or a limited company depends on your current scale, future growth plans, and specific business needs.
• Operating as a sole trader offers a simpler setup process with fewer administrative requirements, making it a manageable route for freelance designers starting out.
• Forming a limited company provides the benefit of limited liability, which ensures your personal assets remain protected if the business faces financial difficulties or debt.
• Drawing an income through a limited company offers more flexibility, allowing you to combine a smaller salary with dividend payments for potential tax efficiencies.
• Choosing a limited company structure can enhance your professional credibility, which is often essential when pitching for corporate contracts or dealing with major suppliers.
• Sole traders are personally responsible for all business debts, whereas limited company directors are only liable for the value of their specific investment or guarantee.
• Accessing business loans or outside investment is often easier for registered companies, as banks and investors typically favour the transparency of the limited company model.

Limited company vs sole trader

Starting out as a sole trader is simple: you need to notify HMRC, register for self-assessment and file a tax return. You’ll have a legal duty to keep records of your business income and expenses, and you’ll need to register for VAT if your annual turnover exceeds £85,000. As a sole trader, you can choose any business name you want, but you’ll need to check that the name you want isn’t in use already. You may want to register a trademark to protect your business name and image.

On the other hand, a limited company is a business that has been registered at Companies House. Unlike sole traders, limited companies are completely separate from their owners, which means that owners can enter into contracts under the company name, leaving the business itself responsible for its own actions, finances and liabilities. Although setting up a limited company may seem like the more daunting choice, it isn’t as difficult as it seems. Again, you need to check that the name you want to use isn’t already in use by a registered company, which you can do here. Then you need to register the company: after which you’ll be up and running within a few hours.

You can read our dedicated article to the more finite informational differences right here.

Finances as a LTD vs Sole Trader

Before you register, however, it’s important to weigh up the differences between the two options. As a sole trader, there is little distinction between you and the business, meaning that any business debts accrued become your own personal debts, and your personal assets — including your house, if you own one — are not protected. This isn’t the case for a limited company, however, as company owners are protected under limited liability. This means they’re only responsible for business debts up to the value of their investments or what they guarantee to the company.

The benefits are clear to see for either setup, but for an interior design company, which is more suitable? The answer depends on how you start out. If you’re solo and working on a freelance basis then setting up as a sole trader is the route you should probably consider. From a financial point of view, it’s just more manageable.

However, if you’re starting up with a team and an existing portfolio of clients, you might want to consider setting up as a limited company as banks tend to favour these when considering loans — if you need to rent an office space, for example. This also means your interior design company could receive the investment you need to spend on all-important startup equipment like computers, photography equipment, software or even marketing.

Tax as an LTD vs Sole Trader

There are also important differences between setting up as a sole trader or as a limited company when it comes to tax. If you’re a sole trader, you pay tax on your business profits via the HMRC self-assessment tax return system. You will need to submit a tax return every year or hire an accountant to do it for you. The deadline for online tax returns is 31st January after the end of each tax year.

If you opt to set up a limited company, however, you have more options about how you draw income from the business. You may decide to take a small salary where tax is deducted via Pay As You Earn (PAYE) and paid at regular intervals to HM Revenue & Customs (HMRC). Your salary will be taxed at a rate depending upon how much you earn: find up to date figures here. You can then take profit from the business as dividends which are subject to a different rate of tax. For limited companies of any size, corporation tax is charged at 19% from 1 April 2017.

You might consider seeking specialist accountancy advice to decide which option would be most beneficial to you. However, again, think about whether you want to form on your own or as a partnership. An interior design startup can be undertaken by a single passionate man or woman from their own home, for instance. All you need is your laptop, a place to sketch and your creativity. If this is you, then forming as a sole trader could be the way to go — not having to register for VAT until you earn £85, 000 is also a huge attraction, of course.

National Insurance 

The amount of National Insurance (NI) you need to pay also varies depending upon which formation type you choose. As s sole trader, you would pay Class 2 NI contributions of £2.95 per week and Class 4 contributions on profits in excess of £8,424 (rates accurate for 2018/19). However, under current plans, Class 2 NI contributions will be abolished from April 2019. If you set up as a limited company, both employer and employee National Insurance (NI) are payable on directors’ salaries and bonuses, which may lead to an overall higher charge.

For interior design startups then, it looks like sole trader represents the strongest option here, especially with the abolishment of Class 2 contributions in 2019. Again, however, it depends if you intend on employing people right away.

Credibility

If you want to promote yourself as the business, and you look at each of these examples individually, being a sole trader can work really well. However, if you plan to eventually hire a team of designers, you may want to think about forming as a limited company from the start. A company can allow you to establish a clearer brand identity, which is especially important within the interior design industry in order to stand out as reputable.

Trading as a limited company can also offer you a more professional image. Since you have been through a process to register your company, it can give the impression of a professionally run organisation. This is useful in certain sectors, such as designing corporate office interiors, as some enterprises may not work with sole traders due to the legal protection a limited company provides. Additionally, when trading with larger companies, say for example a major furniture manufacturer, you may find that they prefer to deal only with established companies.

Whichever formation option you decide on for your interior design business, make sure you weigh up your options first and how you intend to develop. If you’d like some assistance in starting the formation process for yourself, we offer a range of register a limited company packages that make the process a little easier. To learn more about the next steps for your business, see the rest of our advice hub.

FAQs

Is it better to be a sole trader or a limited company as an interior designer?

The best choice depends on your specific business goals and how much personal risk you are willing to take. Sole tradership is simpler to set up and manage, but a limited company offers significant protection for your personal assets and can be more tax-efficient as your earnings grow. Many designers start as sole traders and transition to a limited company as they take on larger projects.

How does limited liability protect my interior design business?

Limited liability ensures that your personal finances and assets, such as your home or car, are legally separate from the company. If your interior design business fails or faces a legal claim, you are generally only liable for the amount you have invested in the company. This is a major advantage over being a sole trader, where you are personally responsible for all business debts and liabilities.

Can I change from a sole trader to a limited company later on?

Yes, you can transition from a sole trader to a limited company at any point as your business expands. This process involves registering your new company name with Companies House and informing HMRC of the change in your business status. You will also need to move your business banking and any professional indemnity insurance policies into the new company name to maintain your legal protection.

What are the main tax differences between these two structures?

As a sole trader, you pay Income Tax on all business profits, whereas a limited company pays Corporation Tax on its profits. Limited company directors can often reduce their personal tax bill by taking a combination of a lower salary and dividend payments. However, limited companies have more complex accounting requirements, so you should weigh the potential tax savings against the cost of professional accountancy services.

Does being a limited company help me win more design contracts?

Operating as a limited company can often improve your professional image and help you secure higher-value contracts with corporate clients or developers. Many larger organisations prefer to work with limited companies because of the perceived stability and the transparent nature of their public filings. It can also make it easier to open trade accounts with high-end furniture and fabric suppliers.

What administrative responsibilities come with a limited company?

Running a limited company involves more paperwork and strict filing deadlines compared to being a sole trader. You are required to file annual accounts and a confirmation statement with Companies House, as well as a Company Tax Return with HMRC. You must also maintain accurate statutory registers, which record details about your directors, shareholders, and people with significant control over the business.