Sole Trader vs Limited Company – Which Is Best for A New Business?

February 28, 2024

Taking the first steps as a new business can be exciting yet confusing. One of the first decisions you will have to make is whether you will run your business as a Sole Trader vs Limited Company. But which one is best for you? We’re here to answer that question and shed some light on the advantages and disadvantages of both options. Let’s start with the basics:

What is a Sole Trader?

Running a business as a Sole Trader means that you are solely responsible for your business. A Sole Trader business doesn’t have any legal identity separate from its owner. As a sole trader, you have absolute control over your business, its assets, and profits after tax.

What is a Limited Company?

Running a business as a Limited Company means that you are setting up a separate entity. As a Limited Company, your business will have its own legal identity separate from yours. This also means its finances will be kept separate from your finances.

Setting Up (limited Company)

Once deciding you want to set up as a limited company, you would need to register your company with the government, giving you a certificate of incorporation as well as registering for Corporation Tax. Depending on the way you would like to register (online or via post) would change how much this would cost to do, however it would usually be a max of £40. During the registration you would declare the business name, business directors and shareholders, as well as check what records you’ll need to keep and publish to HMRC every year. Find out more on how to set up as an LTD here.

Setting Up (Sole Trader)

Once deciding to set up as a sole trader, you need to register for Self-Assessment using your National Insurance Number. This is free to do and would need to be done right away if you earned more than £1000 from being self-employed within the previous financial year, or if you need to prove you’re self-employed for other reasons. As a Sole trader you are responsible for keeping records of the businesses sales and expenses to declare on your self-assessment forms and register for VAT if your turnover is over £85,000 annually. Find out more on how to set up as a sole trader here.

What are the advantages of being a Sole Trader?

There are some obvious advantages of being a Sole Trader. Being considered the sole owner of your business means having complete control to make all key decisions yourself. It also means you are entitled to keep all of the business profits after-tax. Operating as a Sole Trader also comes with fewer rules and regulations than other types of organisations.

What are the disadvantages of being a Sole Trader?

The responsibility of running your business as a Sole Trader does come with its disadvantages. As a result of complete ownership, you are fully liable for any loss your business makes, meaning you may have to use your finances to repay any debts.

Whilst you can hire staff, important business decisions fall to you and there is no one to share accountability with.

What are the advantages of being a Limited Company?

Running a Limited Company results in all shareholders having a limited liability should your business incur losses or run into debt. This means it’s not your responsibility. You can also pay yourself in a combination of salary and dividends. Dividends have lower tax rates than salary pay, meaning that you can be much more tax efficient.

In addition to these benefits, if you ever wish to leave your business, there are likely to be more opportunities for a clean break from a limited company than other business structures.

What are the disadvantages of being a Limited Company?

If you run your business as a Limited Company there may be more difficult and time-consuming administrative tax requirements. However, at Palmers Business Support, we are fully equipped to help you.

What is the main difference between a Sole Trader and a Limited Company?

The biggest difference between these two business structures comes down to responsibility. As a Sole Trader, you alone will be held responsible for your business. A limited company’s equity is split into equal shares, and therefore, responsibility for the business is spread across the shareholders.

Sole Trade vs Limited Company – Which is better?

Sole trader vs limited company, there’s no one-size-fits-all solution when it comes to deciding on a business structure. The decision you make should be based on your circumstances. Thankfully, you have all of the information presented here to help you with your decision.

If you’re considering a sole trader vs a limited company, or to find out more about what’s best for your business, get in touch today!

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