Sole Trader vs Limited Company: What’s the difference?

2 mins read

What is a Sole Trader?

A sole trader is a self-employed person who’s the sole owner of a business; by running the business as an individual the sole trader could be said to be the business. It’s the simplest business structure – which is what makes it so popular!

You can set one up via the government website – you will need to do this for tax purposes.

What is a Limited Company?

A limited company is a business structure that has its own legal identity. Its identity is separate from that of its owners (the shareholders) and its managers (the directors), even if it is run just by one person, who is acting as a shareholder or a director. 

Sole Trader – Advantages and Disadvantages

Advantages of being a Sole Trader:

  • It’s easy to set up.
  • Limited paperwork (although an annual Self-Assessment tax return is still required).
  • Greater privacy than an incorporated business. 

Disadvantages of being a Sole Trader:

  • There are no legal differences between the owner and the business, meaning if the business goes into debt, the business owner is personally liable and can lose personal assets as there is unlimited liability.
  • Tax rates are not as beneficial for sole traders as they are for limited companies.
  • Banks and investors prefer investing in limited companies which can limit the growth opportunities for sole traders

Limited Company Advantages and Disadvantages

Advantages of setting up a Limited Company:

  • Limited companies are separate from their owner and offer limited liability meaning personal assets are not at risk if the business goes into debt.
  • Limited companies tend to be more tax-efficient than sole traders as they pay corporation tax rather than income tax on their profits.
  • A wider range of allowances and tax-deductible costs are available to a limited company which it can claim against its profits. 
  • Once a company name has been registered, nobody else can use it, making it unique.

Disadvantages of setting up a Limited Company:

  • Limited companies have more responsibilities and paperwork, meaning filing the necessary information can be time-consuming and costly.  Hiring a competent accountant can help reduce the burden.
  • These added responsibilities include filing an annual confirmation statement, an annual company tax return and annual accounts. 
  • Information about your company can be found via Companies House meaning details on your directors are required to be shown publicly. 
  • There is a fee payable when a new company is set up and incorporated at Companies House.

How to choose between a Sole Trader and a Limited Company?

It is important to note that the decision you make to become a sole trader or a limited company could impact everything such as profits, tax and paperwork!

If you are struggling to make a decision, FLB’s highly qualified and experienced team is always on hand to offer some advice. Contact us here to speak to the team.

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