When setting up a new company in the UK, the question: ‘Should I be a sole trader or limited company?’ is one of the most commonly asked and one that can hold up your business aspirations.
We discuss the differences between the two structures as well as the pros and cons of each, helping you decide whether establishing your business as a sole trader or limited company is right for you.
While there are other business structure options out there, most new business owners in the UK choose to become either a sole trader or a limited company – and with good reason. Both offer excellent solutions for a variety of business types and industries but there are crucial differences to be aware of.
If you would like to discuss your individual situation further and establish which is the best option for your business please contact us for a free consultation.
Sole trader
In essence, a sole trader is someone who works for themselves and runs their own business. It is the simplest of business structures available to entrepreneurs with no distinction between the individual and the business.
This means a sole trader keeps all the profits made by the business after tax but they are also personally liable for any business debts. It is a common misconception that sole trader businesses are just one person, while there is indeed one owner, the ‘sole trader’, they can have a whole team of employees work under them while still retaining this business structure.
Starting out as a sole trader is simple. All you need to do is register as self-employed with HMRC and complete a self-assessment for each tax year.
Sole trader pros
Easy to set up
All the post-tax profits belong to you
Often simpler accounts, which can be done yourself
No public disclosures such as sole trader details and financial statements
You can easily move from sole trader to limited company
Straightforward to deregister should you wish to dissolve your business
Sole trader cons
Personal liability for all the business debt
Can be less tax efficient as tax rates aren’t always as kind compared to limited companies
Can lack the status of a limited company
Securing funding can be more difficult and can affect your personal credit
Limited Company
Unlike a sole trader, a limited company is its own entity. This means it owns its own assets and is responsible for its own debts.
A limited company is made up of one or more directors who run it and one or more shareholders who own it. Limited companies pay corporation tax, after which any profits can be distributed via dividends to the shareholders.
One thing that is often misunderstood is that many assume a limited company needs to be a large entity. In reality, a limited company only requires one director and one shareholder and this can be the same person.
Limited companies are required to register with Companies House as well as submit annual accounts to them and a tax return to HMRC.
Limited company pros
The limited company is responsible for its own debt
Can be seen as more professional by other businesses
Can be more tax efficient due to more favourable rates compared to sole traders
Funding can be easier and not affect personal credit rating
Limited company cons
Setup is more complicated
Involves more administration
Accounts are more complex and will likely require professional help
Mandatory public disclosures including company directors and financial statements
All the profits belong to the company although this can be distributed to the shareholders through dividends
We offer both sole trader and limited company start-up packages, helping your business get off to a flying start contact us for a free consultation.