Sole Trader vs Limited Company How to choose the correct type for your business

Here are some tips on whether to register as Sole Trader or a Limited Company, so you make the right decision for you and your business.

sole trader vs limited company

Choosing between a Sole Trader vs Limited Company

How to structure your business is something everyone has questions about and we are here to give you some tips to help you make the right decision for you and your business. We will list some of the differences, advantages and disadvantages of being a sole trader (self-employed) or a limited company.

sole trader limited company accounting

Set up and administration

Setting up and running your business as a sole trader is a very simple process and this is one of the main advantages when compared to a limited company. As a sole trader you have full control and do not need to consult other people when making business decisions. Aside from PAYE and NI deductions if you have employees the only other filling requirement for a sole trader is to file an annual Self-Assessment Tax Return.

A limited company, and its directors, have more responsibility than those who operate as sole traders. Limited companies must follow more rules and regulations as well as filing annual confirmation statements and PSC registers, having their records made available to the public and having a registered office address.

Payment options and earning

As a sole trader all of the money in the business is yours and you can take as much as you need whenever you need it, this is known as ‘drawings’. These drawings are what you put as your salary on your self-assessment tax return. As a sole trader you are not legally separate from your business.

A limited company is a separate legal entity to its directors and can have its own assets (money) and liabilities (debt). As a director you can take a salary, any other money you take can either be treated as a dividend if there are sufficient profits in the company or as a directors loan which may need to be repaid to the company.

As a limited company you can have many directors and shareholders who can each put equity (invest money) into the business and this is often seen as an advantage as you have more chance of being able to afford start up costs and initial outlays without having to get loans. However, the more people involved in running the business the more people who need to agree on decisions and this can be a disadvantage.

sole trader

Privacy

A limited company has to provide its accounts to Companies House and these are then made available for the public to see whereas a sole trader’s accounts are kept private.

Although having your accounts made available to the public can be seen as a disadvantage, however an advantage is that it allows investors or financiers to see how well your business is doing and helps them to decide whether or not they want to invest or lend to the company.

As a limited company is a separate legal entity and can have its own assets and liabilities it means that the shareholders (owners) are only liable up to the amount they have invested into the company. This is a big advantage as a sole trader is liable for all debts of their company.

Trading losses

As a new business it is often unlikely that any profits will be made in early years. As a sole trader you can use these losses against other income streams to reduce the amount of tax you pay. This can save a considerable amount of tax.

Business closure

It is much simpler to close a sole trader business down and cease trading than it is with a limited company. As a limited company you must get de-registered from Companies House, have resignations from all directors and a shareholder must be willing to take assets owned by the company. A sole trader will simply pay off any liabilities, collect any money owed to them and notify HMRC they have ceased trading.

limited company

Tax

Limited Company AccountsRunning your business as a limited company can enable you to pay less personal tax, a limited company’s profits are subject to corporation tax which is set at 19% currently.  Sole traders do not have to pay corporation tax but they do have to pay income tax and National Insurance on all profits.  This is often less suitable for high earners.

Company name

As a limited company your name is protected by law once registered with Companies House and no other companies are allowed to use the same name.  A sole trader’s business name can be used by others which could cause problems for your business.

Increased Expenses

A limited company can put some costs against the business that a sole trader can’t. These costs include things like employee’s and director’s executive pensions and use of home expenses, of which maybe better handled via a dedicated bookkeeper. The limited company’s profits can then be reduced before tax is deducted resulting in a lower tax bill due.

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