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Sole trader vs Limited Company – Company formation styles

Updated: Mar 20, 2023

One of the most frequently asked questions that we get asked, is about whether to set up as a Sole Trader or as a Limited Company and whats the difference?

There are advantages and disadvantages to both and we hope to be able to make things easier for you to weigh up the differences between being a sole trader and becoming a limited company.

Whichever you choose will impact on your business, from tax rates to paperwork requirements.

Sole Trader

A sole trader is essentially a self-employed person who is the sole owner of their business. It is the simplest business structure which is probably why it is the most popular. Register via the GOV.UK website which you need for your tax purposes, and you are good to go. It is easy to set up, and apart from that annual self-assessment tax return, there is relatively a small amount of paperwork. You also get a greater level of privacy than incorporated whose business details can be found via companies House.

The main disadvantage of being a Sole trader is that they have unlimited liability, as they are 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 a sole trader you could lose personal assets if things go wrong.

Raising finances can be tricky, as banks and other investors can prefer a Limited Company.

This could limit how you choose to grow and expand your business.

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 is run by just one person, acting as shareholder and director.

As things stand this offers a lower tax rate, (19% for corporation tax VS 20/40/45%

Income tax)

This means forming a limited company can bring you more profits. There is also a wider range of tax-deductible costs that a limited company can claim against the profits.

Unlike a sole trader, a limited company forms a line between the business and the business owner, this means your personal assets are not exposed. You would only lose what you have put into the company. Once you have registered a company name nobody else can use it, unlike sole traders who do not have the same protection. If you have a name in mind, you can always check the on Companies House website before you register.

A Legal requirement for a Limited Company is to have a separate bank account to keep business finances separate from owners. You would need file a yearly annual return for one, as well annual accounts, and thanks to these added responsibilities, going limited can be costly and time-consuming. You would need to either deal with this extra paperwork yourself or hire an accountant to handle it. In contrast to sole traders’ information on your business can be found via Companies House, It would include details on the directors and your financial position is required. This sort of transparency may not appeal to all.

Whatever you decide is the future path for you and your business, make sure you do not rush into any decision and speak to an accountant if you are unsure, as their expertise can be invaluable. Also no matter what structure you choose, ensure you have the correct insurance policies in place to protect both you and your business.

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