Sole Trader vs Limited Company – Which is Right for You?

Sole Trader vs Limited Company – Which is Right for You?

When starting a business, one of the most significant decisions is establishing as a sole trader or a limited company. If you’re at this crossroads, the article will help you make an informed decision – one which benefits you the most.

Since businesses have varying needs, there is no one-size-fits-all solution. Eventually, the model you go for should be based on your unique personal circumstances. Whatever decision you land on will affect your tax payment, business control, and legal liability.

There are many successful businesses set up as sole traders and limited companies. So, as long as you select the right fit, you don’t have anything to worry about. We’re going to examine both in-depth, starting with the sole trader.


What is a Sole Trader?

A sole trader is a self-employed individual that is the sole owner of their business. It is a straightforward business structure, making it the most popular.

Benefits of Sole Trader Setup

Easy Setup: You can quickly get your business up and running with only a small amount of paperwork in a short time. The registration for setting up as a sole trader is also free, saving you many hassles so you can set an achievable timeline for it.

Privacy: You get maximum privacy from the public and share only the details you want. There is no need to publish any details on Companies House giving you all the control.

Avoid Regulatory Issues: A sole trader setup means you don’t have to bother with the IR35 for contractors and associated disguised employment. A lot of these rules apply to only limited companies.

Complete Ownership: You have all the power in running the business. You do not have to seek permission from any directors or shareholders or keep them updated on business progress. This also means all the profits after tax is yours; there is no PAYE scheme to pay yourself.

Running Costs: Associated government costs like national insurance and personal tax for sole traders are cheaper than other business models.

Cons of Sole Trader Setup

Liabilities: You are responsible for any losses the business makes in operations. This also means all your property and personal belongings are at risk making it inevitable to use private money in repaying debts.

High Tax Costs: Sole traders could end up paying more tax than other businesses not using sole trader’s setup even when their operations are the same or similar.

Difficulty Getting Funding: It could be challenging getting funds to start or sustain your business. Banks and investors are typically sceptical of sole trader businesses, which could put a damper on expansion efforts.

Weary Customers: Some customers are reluctant to deal with businesses with the sole model setup. They tend to trust limited companies better as they have better potential or legitimacy.


What is a Limited Company?

A limited company is a business structure that stands independently, with a unique identity different from its managers (directors) and owners (shareholders). This could occur in cases where the company is controlled by just one person (who acts as the shareholder and director) or a group of people. The liability of the individuals that own and operate the company is limited to their investments.

Limited companies are divided into equal shares with a monetary value distributed to shareholders according to their investment. You have to register all the limited companies in the UK with Companies House. 

Benefits of Limited Company

Improved Opportunities for Investment: Investors and banks are more likely to invest in your company if it is a limited company rather than a sole trader. It is also an easy process as you can sell off shares from the business to the investor.

Limited Liability Protection: This legal protection means that the individual company directors are not responsible for their financial losses or debts. If the company gets sued for a debt, your personal properties are safe, and no one can seize them to pay the debt.

Lower Taxes: Limited companies only pay corporation tax on profits compared with sole traders that pay income tax on profits (a higher rate than income tax), class 2 and 4 national insurances.

More Claims: Due to the structure of limited liability, you have the leeway to claim more items as business expenses more than a sole trader.

Better Outlook: Limited liabilities have a more professional look than sole traders increasing their credibility when looking for clients. Also, this improves their borrowing power as they are seen as more reputable than sole traders, and the company will have its credit rating.


Cons of Limited Company

Lots of Paperwork: While a sole trader only has to file a personal tax return each year, a limited company will have to file a company tax return, a set of accounts and a confirmation statement. Also, every director in the company has to file a personal tax return to HMRC.

Personal Details Are Accessible: If you are a shareholder of a limited company, your details are available to the public through Companies House.

Legal Duties: Company directors have legal duties to safeguard their assets and decide to stop trading if it would not make the company survive. A failure in these responsibilities could be dire.


Difference Between a Sole Trader and Limited Company?

There are three main differences between a sole trader and a limited company:

Liability: You are only responsible for the amount put into limited companies, while you are responsible for all the business losses. This also goes for the level of control and profits.

Paperwork: Sole trader business requires a couple of pretty straightforward documents, while limited companies involve several documents. The tradeoff here is that limited companies are more tax efficient.

Ownership: Sole traders are usually self-employed individuals, while ownership of a limited company usually ranges from one person to hundreds of people.


Bottom Line

By now, you should be able to decide which is right for your business – sole trader or limited company. If you’re okay with a small business without worrying about paying more taxes on your profits, then a sole trader is your best bet. But, if you plan to grow and expand your business in the future and increase its profitability, a limited company might be your best bet. Get in touch today with Reed Accountants if you’re still unsure what is the best route for you to take.


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