Sole Trader vs Limited Company

What is a sole trader?If you are self-employed and are the sole owner of your business you are a sole trader. This is the simplest of all business structures and the most popular.  You can set up as a sole trader via the  GOV.UK website, which you’ll need to do for tax purposes.

What is a limited company?

A limited company has its own legal identity, meaning it is separate from its owners (shareholders) and managers (directors).   You can still be the sole business owner of a Limited Company.

Sole trader advantages

Setting up is quick and easy, with relatively little paperwork and fewer compliance requirements.  Just make sure you understand what information you need to gather for your annual self-assessment tax return.

Sole trader disadvantages

As you are not viewed as a separate entity, if the business gets into debt, you are personally liable.  Raising finance can be tricky, which could limit opportunities for growth.  Tax rates on sole traders aren’t usually as beneficial as on limited companies.

Limited company advantages

Limited liability means your personal assets aren’t exposed, so you only stand to lose what you put into the company.  Limited companies are generally also more tax efficient meaning it can be more profitable.  Add to this a wider range of allowances and tax-deductible costs and it can mean more of the money you charge ends up in your pocket.  Registering as a Limited Company also protects your company name – so no-one else can use it.

Limited company disadvantages

There are more compliance and regulatory duties to consider, such as filing annual returns and accounts.  Having an accountant on board also costs more and there is a fee to incorporate, so set-up costs are a bit higher. Life as a limited company brings added responsibilities. These come in the form of what’s called the Director’s Fiduciary Responsibilities, which basically outline what a limited company director must do legally. You’ll need file a yearly annual return for one, as well annual accounts.So there you have it!  Quite a few bits to think about and it may be worth chatting to an accountant and a few friends who are both sole-traders and run limited companies to get a better understanding of the practicalities of it all.]]>