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Limited Company vs Sole Trader

Navigating the world of business structures can be challenging, especially when choosing between a limited company and a sole trader. Each has distinct advantages and potential drawbacks that can significantly impact your business operations and financial health.
Updated 5 Jun, 2024

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Komal Habib

Midweight Copywriter

Limited Company vs Sole Trader

Choosing the right business structure is a crucial first step for any UK entrepreneur. Two popular options are becoming a sole trader and forming a limited company. But what are the key differences between these structures, and which one is right for you?

This comprehensive guide explores the advantages and disadvantages of both sole traders and limited companies, the critical differences between them and helps you decide which is the best fit for your business in the UK.

What is a sole trader?

A sole trader is the simplest business structure in the UK, where a single individual owns and operates the business. It’s a popular choice for freelancers, small business owners, and self-employed individuals due to its straightforward setup and management.There’s no legal distinction between your personal finances and your business finances.

Advantages of Being a sole trader

There are several advantages to being a sole trader in the UK. To see if being a sole trader could be a solution for you, the most common advantages is listed here:

Simple Setup:

There’s minimal paperwork involved in becoming a sole trader. You only need to register with HMRC for self-assessment tax.

Full Control:

You have complete decision-making authority over your business.

Keeping Profits:

All business profits belong to you, after paying taxes.

Tax Simplicity:

All business income is treated as personal income, making tax filings straightforward.

Privacy:

Unlike limited companies, sole traders are not required to disclose financial information publicly.

Do sole traders have limited liability?

No, sole traders do not have limited liability. This means that you, as a sole trader, are personally responsible for any debts or legal actions against your business. Your personal assets, such as your home or car, could be at risk if your business incurs debts it cannot pay.

Disadvantages of being a sole trader

When choosing to be a sole trader, it’s important to understand the full picture, so you choose the right decision for your company. To get the full picture, you must also be aware of advantages and disadvantages. Here are a few disadvantages to consider:

Unlimited Liability:

This is the biggest drawback. You are personally liable for all business debts. If your business cannot pay its debts, your personal assets like your car or house can be at risk.

Tax Considerations:

Sole traders pay income tax on their business profits. National Insurance contributions also apply.

Limited Growth Potential:

Raising capital as a sole trader can be challenging.

Limited Companies

A limited company is a separate legal entity from its owners (shareholders) and directors, meaning it can own assets, incur liabilities, and enter into contracts in its own name. This offers significant protection for your personal assets. This structure is more complex and regulated compared to a sole trader but offers significant advantages.

Advantages of a Limited Company

Limited Liability:

Shareholders’ liability is limited to the amount they invest in the company.

Tax Efficiency:

Limited companies pay corporation tax on profits, which can be lower than income tax for high earners.

Credibility and Growth Potential:

A limited company structure can enhance your business’s credibility and attract investment for growth.

Professional Perception:

Operating as a limited company can enhance credibility and attract more clients or investors.

Investment Opportunities:

Limited companies can raise capital by selling shares, facilitating business growth.

Disadvantages of a Limited Company

More Complex Setup:

Setting up and maintaining a limited company involves more paperwork and legal requirements.

Increased Costs:

There are ongoing costs associated with running a limited company, such as annual accounts filing fees.

Less Control:

Shareholders may not have complete control over the company, especially if there are multiple shareholders.

Sole trader vs Limited Company in the UK: Key Differences

Legal Structure and Liability

  • Sole trader: The business and the owner are legally the same entity, leading to unlimited personal liability.
  • Limited Company: The company is a separate legal entity, providing limited liability protection to its owners.

Taxation

  • Sole trader: Profits are subject to income tax and National Insurance contributions.
  • Limited Company: Profits are subject to corporation tax, and directors may also receive dividends, which can be more tax-efficient.

Administrative Burden

  • Sole trader: Fewer regulatory requirements, with annual self-assessment tax returns.
  • Limited Company: More regulatory obligations, including annual accounts, corporation tax returns, and potential audits.

Financial Disclosure

  • Sole trader: Financial details remain private.
  • Limited Company: Must file annual accounts and other financial information with Companies House, making it publicly accessible.

Deciding Between Ltd or sole trader

When deciding whether to operate as a limited company or a sole trader, consider the following:

Risk Tolerance:

If your business carries significant financial risk, the limited liability of a limited company can offer crucial protection.

Growth Ambitions:

Limited companies may be better suited for businesses looking to expand and attract investors.

Tax Considerations:

Consult a financial advisor to understand the tax implications of each structure based on your specific circumstances.

Administrative Capacity:

Be prepared for the increased administrative workload associated with running a limited company.

Which Should You Choose?

The best structure for your business depends on your specific circumstances. Here’s a quick guide:

  • Choose a sole trader if:

You’re just starting out, have low profits, and value simplicity and control.

  • Choose Limited Company if:

You want to limit your personal liability, plan for significant growth, or require investment.

OneMoneyWay: Your Business Account Partner

Regardless of your chosen structure, OneMoneyWay can be your business account partner. We are a payment and financial management platform designed to simplify your financial operations.

OneMoneyWay offers a robust business account solution, complete with features like:

  • Dedicated Business IBAN: Manage your business finances efficiently with a unique IBAN for receiving and sending payments.
  • Seamless International Transactions: Send and receive international payments quickly and securely with competitive exchange rates.
  • Business Cards: Empower your team with business debit cards for streamlined spending management.
  • Multicurrency Support: Simplify managing your finances in multiple currencies.

OneMoneyWay is not a bank, but a platform where we offer all the essential business account features you need to run your UK business smoothly.

Ready to Elevate Your Business?

Join OneMoneyWay for modern FinTech solutions. Empower your business today!

FAQs

What’s a sole trader?

A sole trader is an individual who owns and operates a business alone, with no distinction between the owner and the business entity.

What is the difference between a sole trader and a private limited company?

The primary difference is in legal structure and liability. Sole traders have unlimited personal liability, while limited companies offer limited liability protection.

Do sole traders have limited liability?

No, sole traders are personally liable for all business debts and obligations.

What are the advantages of being a sole trader?

Simplicity in setup, full control over business decisions, straightforward tax filings, and privacy are key advantages.

Should I choose a limited company or sole trader structure?

The decision depends on factors like risk tolerance, growth ambitions, tax considerations, and willingness to handle administrative responsibilities.

Can I switch between being a sole trader and a limited company?

Yes, you can change your business structure from a sole trader to a limited company. However, there are tax and legal implications to consider. Consulting with an accountant is recommended.

Do I need an accountant if I’m a sole trader?

While not mandatory for sole traders with simple finances, an accountant can offer valuable tax advice and ensure you’re compliant with regulations.

How much does it cost to set up a limited company?

There are government fees associated with registering a limited company, typically around £12. However, additional costs may apply depending on your chosen formation method and professional services used.

Komal Habib

Content Writer at OneMoneyWay

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