Sole Trader or Limited Company: Which One Should You Choose?
Photo by Álvaro Serrano on Unsplash
“Should I register as a sole trader or limited company?”
This is one of the most important questions any new business owner can ask. The legal structure of your business may have a profound impact on how you operate, so it’s important you choose the right one.
In today’s blog post, we’re taking a look at the two most common types of business structure and the advantages and disadvantages of both. Hopefully, the information you read today will help clarify some of the more complicated aspects and make your decision a little easier.
Sole trader
A sole trader is the same thing as being self-employed. You run your business as an individual, and you are personally responsible for all aspects of the business, including losses, bills, and all debts. Essentially, you are the business.
A sole trader is the simplest business structure. It is also the most popular. In 2018, sole traders made up 60% of all businesses in the UK.
Limited company
Limited companies are the second most popular structure in the UK. A limited company is a distinct legal entity from its owners and managers (even if there is only one of you). The company’s finances are separate from your personal finances and your liability is limited to what you have invested in the company.
To figure out which one might be best for you, let’s take a look at the advantages and disadvantages of both.
Sole trader advantages
Quick and easy to set up. You simply let HMRC know you’re self-employed, register for self-assessment as a sole trader and pick a business name.
You can name your business something official or simply use your own name.
Comparatively very little paperwork. You need to keep accurate records of sales and expenses and fill in an annual self-assessment form. If you register for VAT you will also need to file VAT returns.
Greater privacy. Information about you and your company is not publicly available via Companies House.
Complete control. You decide how to run your business, and you can keep all post-tax profits for yourself.
Sole trader disadvantages
Unlimited liability. You are responsible for paying off any debts incurred by your business. Your personal assets and property are not protected and may be used by creditors to settle debts.
Raising finance can be difficult, as banks and investors generally favour limited companies.
There are no tax-free benefits or incentives for the self-employed. You’ll also pay income tax on all profits above the personal tax allowance.
Limited company advantages
Limited liability. You can only lose what you have invested in the company. Your personal assets are protected.
You cannot be personally sued or held responsible for the actions of the company.
A limited company is more tax-efficient, paying only dividends and corporation tax on profits. Corporation tax rates are often lower than Income Tax rates so forming a limited company can be more profitable. There are also possible tax-free benefits and incentives.
If you register a company name, no one else can use it.
Limited companies may find it easier to raise funds from outside sources (banks and investors).
Limited company disadvantages
Greater accounting responsibilities. You must file annual accounts with Companies House and full corporation tax accounts for the HMRC.
Setting up a limited company is more involved than establishing yourself as a sole trader. There’s also a small fee for incorporating.
Information about your business can be found on Companies House. This public information includes director details and your company’s earnings.
As you can see, there’s a lot to think when it comes to choosing between a sole trader and limited company. With clear advantages and disadvantages to both, there’s no easy answer. Ultimately it comes down to whichever structure you feel best suits you and your business.