So, what are the differences between a being a sole trader and a limited company? Both are private companies, however, they have different legal structures.

What is a Sole Trader?

A sole trader is essentially a self-employed person. You own and run your business as an individual. This is the simplest business structure. All you need to do is tell HMRC you are self employed and register for self-assessment to complete your annual tax return. As a sole trader, you are personally liable for all your businesses assets and debts.  There is no separation between ‘you’ and ‘the business’.

What is a Limited Company?

A limited company is totally separate to the owner of the business. A limited company requires at least one director, however, this doesn’t mean that they are personally liable for the company’s assets and debts. A director’s personal assets, such as a house or car, would not be at risk if the business were to create debts. As the legal structure of a limited company is different to a sole trader, there are more rules and regulations to follow which can be time consuming and costly, which is why many owner/managers of limited companies choose to work with an accountant for extra support.

Advantages

Sole Trader

  • Easy to set up and little paperwork involved.

  • Only need to file a self-assessment tax return annually

  • Your personal details can be kept more private as they will not appear on Companies House.

  • Can be cheaper and simpler to run than a limited company.

Limited Company

  • Your business has ‘limited liability’ which means only your business assets are at risk if the business were to get into debt. The business owner/manager and the business are legally separate.

  • Your business name becomes protected once it is registered, no one else can register that name as a limited company.

  • More flexibility for how you take money from the business to pay yourself for your input, which can lead to lower tax and NI

  • Limited companies can be more tax efficient than sole traders as they pay Corporation tax rather than income tax which is a lower tax rate.

  • Can receive finance and attract investors as your company shares can be bought relatively easily.

  • Limited companies sometimes have more chances to secure tax reliefs, deductions and allowances.

  • Can be more attractive to customers and suppliers, as the limited company status can imply more stability, reputation etc

Disadvantages

Sole Trader

  • You are personally liable for everything as sole traders have unlimited liability.

  • If the business gets into debt, the business owner can lose personal assets.

  • When you reach a certain level of earnings, tax rates can be quite harsh.

  • Getting loans and raising finance can be difficult. Banks and investors sometimes prefer limited companies or partnerships.

Limited Company

  • Your personal details such as Name and Address, can be found on Companies House.

  • More paperwork involved in running a limited company.

  • You will need to file a set of accounts, a confirmation statement and a company tax return.

  • Business information such as directors details and companies earnings are required to be shown publicly on Companies House.

We can help with business plans or cash flow forecasting, or if you could us a little more advice on which business structure is best for you, please do get in contact today. You can book a call with Kim at a time that suits you or give the office a call.

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