8th December 2018

JDH TOP TIPS | Difference Between a Sole Trader & a Limited Company

Starting a business is often a complex affair, with the main decision being whether to become a sole trader or set up as a limited company.

What is a sole trader?

A sole trader is essential a self-employed person who is the sole owner of their business. It’s the simplest business structure out there – which is probably why it’s the most popular and you can set up as one, via the GOV.UK website.

What is a limited company?

A limited company is a type of business structure that has its own legal identity, separate from its owners (shareholders) and its manager (directors). This remains the case even if its run by just one, acting shareholder and director.

Sole Trader vs Limited Company?

Sole Trader Advantages

  • Easy to set up and relatively little paperwork, other than an annual self-assessment tax return.
  • Greater privacy than incorporated businesses, whose details can be found via Company House.

Sole Trader Disadvantages

  • Sole trader has unlimited liability, as they’re not viewed as a separate entity by UK law. This means that if the business gets into debt, the business owner is personally liable. As such, sole traders could lose personal assets if things go wrong.
  • Raising finance can be tricky, as banks and other investors tend to prefer limited companies. When you reach a certain level of earnings, it might not be quite as lucrative to stay as a sole trader.

Limited Company Advantages

  • Unlike a sole trader a limited company has the benefit of limited liability, as incorporation forms a legal distinction between the business owner and their business. This means that personal assets aren’t exposed – you only lose what you put into the company.
  • Limited companies stand to be more tax efficient than sole traders, as rather than paying income tax they pay corporation tax on their profits. As things stand this offers a kinder tax rate, meaning forming a limited company can be more profitable. In addition to this, there’s a wider range of allowance and tax-deductible costs that a limited company can claim against its profits.
  • Once you’ve registered a company name nobody else can use it, in contrast to sole traders who aren’t offered the same protection.

Limited Company Disadvantages

  • Life as a limited company brings added responsibilities. These come in the form of director’s fiduciary responsibilities, which basically outline what a limited company director must do legally. This includes filing a yearly confirmation statement and annual accounts.
  • Thanks to these added responsibilities going limited can be costly and time-consuming, as you’ll need to either deal with this extra paperwork or hire an accountant to handle it.
  • In contrast sole traders’ information on your business can be found via Company House, details on Directors and your company’s earnings required to be shown publicly. This sort of transparency may not appeal to all.
  • Taking money out of limited company has to be planned carefully. Tax rules often change and it’s really important to ensure you work closely with your accountant during the year to be sure this is done in the most tax efficient way.

You can see from this article that choosing between a sole trader or limited company involves many tax and non-tax issues.

Overall, trading as a limited company can offer benefits of both security and tax advantages at certain profitability levels, however every business is different and a one size fits all approach is not suitable, particularly given the recent changes to the taxation of dividends.

If you are considering creating a sole trader or limited company contact us 01443 740800 to advise you on your specific circumstances.