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Sole Trader vs Limited Company

Every business, no matter how big or small, must have a legal structure. One of the most important questions you should ask yourself when starting a business is; "How should the business trade?". There has always been a debate about whether being a sole trader or a limited company is better. Here we will look at the pros and cons of both structures.


What is a sole trader?

A sole trader is essentially a self-employed person who is the sole owner of their business. It’s the simplest structure and the easiest to set up and manage - it’s the most popular in the UK. To operate as a sole trader you simply need to visit GOV.UK website and follow the steps.


What is a limited company?

A limited company has it's own legal identity, separating it from the shareholders (owners of the business). This is the case whether there is just one shareholder operating the business alone, or if there are multiple shareholders. Under this structure, the liability of the owners is limited to the amount of capital they have invested.


Sole Trader - Pros and Cons

✅ Quick and easy to set up and no requirement to register with Companies House

✅ More privacy - information about the business is not listed on Companies House

✅ Typically low start up costs and no registration fee to HMRC

✅ Fewer legal administrative requirements, only a self assessment tax return once a year (visit our blog on self assessments for tips)

✅ You will own all business profits and can move money freely between business and personal accounts without tax implications


❌ You will have unlimited liability for all debts and legal claims.

❌ The tax rate is higher (20-45%) than corporation tax paid by businesses (19%). You will also be required to pay NI contributions. ❌ Creditors and lenders are more tentative, you may be required to personally guarantee any borrowings or credit ❌ Can only be set up and owned by one person, giving the owner sole responsibility for the whole operation


Limited Company - Pros and Cons

✅ Minimal personal liability. The company is a separate legal entity, meaning if your business runs into trouble, your personal assets are secure. The business owns all debts and profits. ✅ A professional image. Investors, banks and other businesses are usually more likely to deal with limited companies, largely due to the closer regulatory attention given to incorporated companies. ✅ Tax efficiency. Limited companies currently pay 19% on profits, as opposed to the 20-45% charged to sole traders. ✅ You can reduce your income tax and NI contributions by taking remuneration via a mix of dividends and salary. ✅ Brand protection. Once your company name has been incorporated, it can’t be used elsewhere.

❌ More administrative requirements. You must be registered with companies house, pay a registration fee and file an annual confirmation statement. ❌ Stricter procedures are in place when it comes to withdrawing money from the business

❌ May need to appoint an accountant to help with tax affairs as limited companies are regulated and more closely monitored. ❌ Personal and company information is required to be made public on companies house for the benefit of stakeholders ❌ A tighter legal structure is in place to regulate limited companies and how they operate.

Summary

This is an informative guide, each company and its leader will have different requirements and will find that one structure suits their operation better. If you’re unsure, it may be best to test the waters as a sole trader, and as revenue streams increase, switch to a limited company to benefit from the tax savings. Once you’re incorporated as a business, if you wish to cease trading you will need to liquidate the business and have it struck off. The company name can not be re-used.

Apex Accountants are always available for free advice and guidance on company formation or anything else you may require. Simply complete the form on our contact page or send an email to apex-business@outlook.com






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Southampton, Hampshire, UK

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