Limited Company Vs Sole Trader?
Which one should I choose?
If you're starting a business in the UK, one of the first decisions you'll need to make is whether to set up as a limited company or a sole trader. Both options have their advantages and disadvantages, and the choice you make will depend on your individual circumstances and goals. In this blog, we'll explore the key differences between the two and help you decide which one is right for you.
Read time: 4 Minutes Date: 21 May 2023
A limited company is a separate legal entity from its owners. This means that the company can enter into contracts, own assets, and incur liabilities in its own name. The company is run by directors, who have legal and financial responsibilities for the business. Shareholders own the company and can receive dividends and share in the profits.
Advantages of a Limited Company:
Advantages of a Limited Company:
- Limited liability: Shareholders are only responsible for the amount they have invested in the company. This means that their personal assets are protected if the company runs into financial difficulties.
- Professional image: A limited company may be perceived as more professional and established than a sole trader.
- Tax benefits: Limited companies can be more tax-efficient than sole traders, as they can pay corporation tax on profits rather than income tax.
- Easier to raise finance: Banks and investors may be more willing to lend to a limited company than a sole trader.
Disadvantages of a Limited Company:
- More administrative work: A limited company has more legal and regulatory requirements than a sole trader. This includes registering with Companies House, filing annual accounts and tax returns, and holding annual meetings.
- Higher costs: Setting up and running a limited company can be more expensive than being a sole trader.
- Less privacy: A limited company’s financial information is publicly available, whereas a sole trader’s is not.
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Sole Trader
A sole trader is a self-employed individual who is personally responsible for the business. They are not a separate legal entity and do not have shareholders or directors. A sole trader can employ staff (running a payroll), but they are personally responsible for any debts or liabilities incurred by the business.
Advantages of a Sole Trader:
- Simpler to set up: There are fewer legal and regulatory requirements for a sole trader than a limited company.
- More privacy: A sole trader’s financial information is not publicly available.
- More control: A sole trader has complete control over the business and its finances.
Disadvantages of a Sole Trader:
- Unlimited liability: A sole trader is personally liable for any debts or liabilities incurred by the business. This means that their personal assets are at risk if the business runs into financial difficulties.
- Less professional image: A sole trader may be perceived as less professional and established than a limited company.
- Tax inefficiencies: Sole traders may pay more tax than limited companies, as they pay income tax on profits rather than corporation tax.
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Conclusion
The decision to start your trade as a Limited Company Vs Sole Trader depends on your individual circumstances and goals. If you want to protect your personal assets and present a professional image, a limited company may be the best option. However, if you want to keep things simple and have more control over your business, a sole trader may be the way to go.
It’s important to seek professional advice and carefully consider your options before making a decision in choosing Limited Company Vs Sole Trader.
Get in touch with us to make the right decision which suits your needs and stay compliant. We, as Chartered Accountants in Leytonstone, London, with an experience of over a decade to help you get started and stay in business.
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