Limited Company or Sole Trader

27 May 2021

Should I be a limited company or a sole trader? 

Regardless of the size of your business, it must have a legal structure. Most UK businesses choose to be either a limited company or a sole trader. It is estimated that there are 2M limited companies and 3.5M sole traders in the UK. So, what is the difference between the two? And which structure may be best for your business?  

A Limited company is a business structure that has its own legal identity which is separate from its owners (shareholders) and managers (directors). This set up remains the case regardless of how many people own or manage the limited company. For example, one person could act as the shareholder and director. 

A sole trader is a person who is self-employed, and they are the sole owner of the business. Setting up as a sole trader is the simplest business structure available and you can set up your sole trader business on the GOV.UK website which will need to be done for tax purposes. Whilst this is a short, simple process we would still advise you consult an accountant to complete this for you as mis-registering can have knock-on impacts for national insurance purposes. 

With each legal business structure there are benefits and drawbacks. It is essential that you understand these and consider how they may affect you and your business before deciding.  

So, starting with limited companies here are the realities of each:

  • A limited company has what is called limited liability as the incorporation forms a legal division between the business owner and the business itself. This means personal assets won’t be exposed and owners (shareholders) will likely only lose what they put into the company. However, it is worth noting that if the director (who is likely to also be a shareholder in this case) is deliberately trading insolvently, i.e. running up debts in the company, HMRC do have the power to remove this legal division
  • Generally, limited companies can be more tax efficient than sole traders. This is because as a limited company Corporation Tax is paid on profits as opposed to Income Tax, with Corporation Tax rates set lower than Income Tax
  • When you have registered your limited company name, no one else can use this name. Sole Traders aren’t offered the same level of protection.
  • It is easy to set yourself up as a sole trader. There is relatively little paperwork to be completed, other than an annual self-assessment tax return.
  • As a shareholder and/or director of a limited company there are a number of responsibilities that must be completed. These are known as the Directors Fiduciary Responsibilities.
  • There is more paperwork that needs to be completed such as annual returns, annual accounts and general up-keep of company registers.
  • You may need to hire an accountant to ensure you are compliant with your tax liabilities and you’ll need to pay a fee to incorporate too as the process of registering as a limited company is far more complex than a sole trader.
  • When you set up as a limited company your business details can be found on Companies House. Any accounts that are completed will be stored on Companies House and these accounts will include information on the directors and some aspects of business performance.

Sole Traders: 

  • Sole traders are not viewed as a separate entity by UK law. So if the business gets into debt, the business owners are personally liable. This means that if the business struggles, sole traders could lose personal assets.
  • Banks and other investors tend to prefer limited companies. One of the reasons for this is because they have access to more information on the business and its trading history. This limits the expansion opportunities of sole traders as they will often struggle to source finance.
  • Tax rates on sole traders are not always as advantageous as they are on limited companies. When you reach a certain level of earnings, it might not be quite as beneficial to stay a sole trader.
  • Sole traders will benefit from greater privacy than limited companies. This is because sole trader details cannot be found on Companies House.

Regardless of which structure you choose, it is important to research the insurances you’ll need, as running either type of business will bring its own risks.  

Ultimately, it’s essential to weigh up the difference between sole trader and limited company, as the structure you choose could impact everything from profits to paperwork (i.e. your time spent doing paperwork or paying for someone else to do it for you!).  

Before you make a decision, it is best to speak to an accountant, understanding your unique position can also have a big impact on the right legal structure for you not to mention drawing on their tax expertise! 

For a complimentary Discovery Call to discuss the most appropriate level of support, a personalised quote and a guarantee of our best possible service, please complete the form below and one of our senior advisors will contact you.
Or if you prefer, please call 01296 681341 for our Wingrave Bucks Accountants office.

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