Businesses of all sizes need a legal structure, which is one of the most important decisions a new business owner needs to make, but first, you must understand your options. You can choose to be either a sole trader, partnership or limited company, with the majority of business owners opting to be either a sole trader or a limited company.
Here, we outline the differences between being a sole trader and limited company, and the benefits and drawbacks of either option.
What is a sole trader?
A sole trader is the simplest and most popular form of business structure. As the name suggests, a sole trader is the sole owner of their business, and the owner and business are one legal entity. Sole traders are able to keep the business’ profits after paying tax, but you are also personally responsible for any losses. There are also particular rules that must be followed regarding running and naming your business.
Full details on how to set up as a sole trader with HMRC here: https://www.gov.uk/set-up-sole-trader.
What is a limited company?
A limited company is a version of business structure that has its own legal identity that is separate from its owners (shareholders) and its managers (directors). Regardless of whether the company is run by one person, the above still remains as one person can act as shareholder and director.
Advantages of being a sole trader
- Relatively little paperwork and simple to set up.
- Increased privacy in comparison to incorporated businesses, whose details can be found via Companies House.
Disadvantages of being a sole trader
- A sole trader is personally responsible for any debt incurred by the company. Sole traders have unlimited liability, which means there is no legal distinction between themselves and their business.
- Sole traders can lose personal assets.
- Banks prefer to lend to limited companies. This limits the opportunity for expansion for sole traders.
- Taxes paid can be more favourable for limited companies, as when you reach a certain level of earnings, it may not be as lucrative to remain a sole trader.
Advantages of a limited company
- A limited company is a separate legal entity from its business owner.
- Personal assets are not involved with the company, you only lose what you put into the company. Unless personal guarantees are provided to lenders.
- You can protect the business name and likeness as a limited company, meaning nobody else can use it.
- Limited companies can be more tax efficient as they pay corporation tax on their profits rather than paying income tax. This means that limited companies are offered a wider range of allowances and tax-deductible costs, as well as a kinder tax rate.
Disadvantages of a limited company
- There are a number of additional responsibilities that limited company owners have to follow, which can be time-consuming and costly. These include filing an annual company tax return as well as annual accounts.
- Information from a limited company can be found via Companies House, meaning details on directors, balance sheet etc. are required to be displayed publicly. This sort of transparency is not appealing to everyone.
Ultimately, business owners need to weigh up the differences between both business structures as the route you choose could impact on profits, paperwork and liability. We recommend speaking to our team before rushing into any decisions, and we will give our expert advice regarding which structure would be more suited to your business.
If you have any further questions on limited companies or sole traders, speak to our team by clicking here: https://www.leecoombesaccountancy.co.uk/contact-us/