Company Structures Guide: Sole Traders and Limited Companies
10/12/2020
The vast majority of the businesses in the UK will be set up either as a Sole Trader or a Limited Company. This guide will help you understand the difference between the two and determine which is best for your circumstances.
What is a Sole Trader?
A sole trader is a self-employed person who is the sole owner of their business. A business run as a sole trader is simple to set up and run. There are some procedural requirements, but they are straight-forward and you can find them explained on the gov.uk website.
As a sole trader, you will have to complete an annual self-assessment tax return but you should bear in mind that Tax rates for sole traders can be higher than on limited companies. When you reach a certain level of earnings, it might not be quite as lucrative to stay a sole trader.
Operating as a sole trader offers greater privacy than as a limited company where company details (including accounts) are made public and can be viewed via the Companies House website.
You should remember that a sole trader will have unlimited liability for their business so, if the business gets into financial difficulty, the business owner is held personally liable
Raising finance as a sole trader is not always easy as banks and other investors tend to prefer limited companies; this may limit the opportunities for a sole trader’s business to expand.
What is a Limited Company?
A limited company is a business that has its own legal identity, separate from its owners (the shareholders) and its managers (the directors).
A limited company is a completely separate entity to that of the shareholders – the incorporation of the business makes a very clear distinction between the business owner and the business. Unlike businesses that operate as a sole trader, if a limited company gets into financial difficulty, only the money that the owner has put into the business is at risk (so the personal assets of the owners are protected)
Limited companies are usually more tax-efficient than sole traders; this is because they pay Corporation Tax on company profits, rather than Income Tax. Corporation Tax is generally at a lower rate than income tax.
What are the Financial Advantages of Running a Limited Company?
- a wider range of allowances and tax-deductible costs that can be claimed against profits.
- the company name of a limited company cannot be used by another entity
What are the Additional Responsibilities Relating to Running a Limited Company?
- A director of a limited company has certain legal responsibilities, known as Director’s Fiduciary Responsibilities; these responsibilities include ensuring the annual company return and accounts are accurate and filed in a timely manner. Directors can undertake these tasks themselves but they will often rely on the services of their accountant so it is important to factor in some additional costs to cover their services
- You should remember that as a director of a limited company, your details, along with the financial details of your company will be available via Companies House
Take some time to consider which type of business is best for you and your business. You would be well advised to take advice from your accountant
Elsewhere, investigate insurance - regardless of which structure you choose - as running either type of business will bring its own unique risks.
If you decide a limited company is for you, why not take a look at; How to Set Up a Limited Company
Now you know the difference between a Limited Company and a Sole Trader.
Take some time to consider which type of business is best for you and your business. You would be well advised to take advice from your accountant
Elsewhere, investigate insurance - regardless of which structure you choose - as running either type of business will bring its own unique risks.
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