Sole trader vs limited company

20th June 2022

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A sole trader is basically a self-employed person who’s the sole owner of their business. It’s the most popular business structure and also the simplest.  You can set up as one via the website and you need to do so within a set time of staring to trade.

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 managers (directors). This remains the case even if it’s run by just one person, acting as shareholder and director.

Sole trader advantages

  • easy to set up and manage on your own
  • File online with HMRC and can use software to be compliant with new online filing requirements
  • greater privacy than incorporated businesses, as personal details can be found on Companies House
  • Simple to close down if you cease to trade too

Sole trader disadvantages

  • sole traders have unlimited liability, which means there’s no legal difference between themselves and their business.  This means that if the business gets into debt, the business owner is personally liable
  • sole traders can lose personal assets such as their home if things go wrong
  • getting finance can be harder, as banks and other investors tend to prefer limited companies and it can be harder to get a mortgage for yourself when you need one
  • Generally a sole trader will pay more tax than a limited company as you pay tax and extra National Insurance on your profits, if you are under retirement age

Limited company advantages

  • A limited company is legally separate from its business owner, who has limited liability
  • this means personal assets aren’t exposed – you only stand to lose what you put into the company
  • Once registered your company name can only be used by the company

A limited company pays tax based on the profits of the company based on the corporation tax rates in force at the time.

At present this works out more tax efficient for most business once their profits are over around £25k. In addition to this, there’s more expenses and deductions that a limited company can claim against its profits that can make it more tax efficient for the owners

Limited company disadvantages

  • limited companies have more responsibilities. A director has, what are called, fiduciary responsibilities which outline what a limited company director must do legally
  • These responsibilities should not be underestimated, and most companies prefer to engage an accountant to make sure they don’t fall foul of these and end up disqualified
  • Lots of information about your business can be found via Companies House, things such as your age, name and address and business balance sheet are all available on public record. This sort of transparency may not appeal to all

A company has to file annual accounts with both Companies House and a tax return with HMRC.  If these are not filed on time the penalties can mount up so it’s important to keep on top of these and ask for help from a professional if you need it.

You’ll need to pay a fee to incorporate too – Give us a call if you’d like to to learn more.

Choosing between a sole trader and limited company

Before you go down one route or another, you need to weigh up the difference between a sole trader and limited company, as the structure you choose could impact on you and your lifestyle more than you think. Setting a company up with the right shareholders in the right structure is also key to maximise the tax benefits and future planning options for you and your family.

If you’d like a free chat about the best option for you then call Katrina or Russell on  0333 200 0714

Would you like to take a fresh approach to your accounts?