Sole Trader or Limited Company – the Pros and Cons

Jan 27, 2023

Sole trader or limited company – the pros and cons

One of the first major decisions you’ll make as a business owner is whether to become a self-employed sole trader or set up a limited company.

Both these business structures have their strengths and weaknesses, but there’s no one-size-fits all solution. At the end of the day, the best choice for you will depend on your business, and how you want to run things.

Struggling to know which one to pick? Let’s look at how they compare.

What’s the difference?

There are important distinctions between sole trader businesses and limited companies.

Setting up as a sole trader is fairly straightforward, so it’s no surprise that many businesses start out this way. As the owner of a sole trader business, you’ll run it as an individual, and you’ll be classed as self-employed.

But as a sole trader, you don’t just run the business – you are the business. There’s no legal distinction, which means you get to take home your profits, and you’re personally responsible for your losses.

Incorporating a business is usually a more complicated process, but it’s not without its benefits. Unlike a sole trader business, a limited company is legally separate from its owners.

As the director of a limited company, you’ll have stricter rules to abide by, but you won’t be as liable if things go wrong – and you may get better tax breaks, too.

Pros and cons of becoming a sole trader

It’s relatively easy and straightforward to set up as a sole trader. If you want to become self-employed, you just need to register for self-assessment on the HMRC website and file a return to calculate your income tax once a year – that’s it. No fuss, no extra fees, and you can get going straight away.

You also won’t need to rely on shareholders to approve decisions. Since you are the business, you have the freedom to take it in whatever direction you want it to go.

However, there are downsides to this business structure. As mentioned, you’ll be more liable if things go wrong as a sole trader. With no legal distinction between you and the business, if it gets into debt, your personal assets may be put at risk.

Unfortunately, while you’ll have fewer obligations to the tax authorities, you’ll also have fewer opportunities to reduce your tax bill. Limited companies get access to more relief than sole trader businesses.

You may also be overlooked for funding opportunities. Sole traders are generally viewed as less trustworthy than limited companies, and lenders may be less likely to invest as a result.

Pros and cons of running a limited company

If you set up a limited company, you’ll be less liable if your business gets into debt. It will be a separate legal entity, making it responsible if something goes wrong.

There are also more opportunities for tax planning, which may make this option less expensive in the long run. Instead of paying income tax on all of the money your business generates, you’ll be able to decide how much of your company’s profits to extract as income, and how much to reinvest in your business.

You’ll have access to corporation tax reliefs such as R&D tax credits and creative industry tax relief, and you may be able to increase your tax efficiency as a company director by paying yourself a combination of salary and dividends.

Limited companies also come with more prestige, making it easier to attract investors and obtain funding.

However, running a limited company is more complicated, and you’ll face tighter rules as a director, as well as more admin and reporting obligations. To set up, you’ll need to register with Companies House and pay a small fee, as well as file an annual corporation tax return.

You’ll also have limited privacy. When you register your limited company with Companies House, you’ll be required to provide details such as your name and registered address, which will be made available to the general public. The same goes for any other company directors or shareholders.

Choosing the right structure

As financial experts, we can help you weigh up your options. And once you make your decision, we can also offer our services and support to reduce your administrative burden.

Unsure about which path to take? Get in touch with our friendly team today.

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