Sole Trader or Limited Company in the UK: Which is best for you?
Are you a sole trader that would benefit from becoming an incorporated Limited Company?
Choosing a legal structure is one of the most important decisions a new business owner needs to make and can be one of the most difficult to understand. The hardest part, is that the best option is dependent on your personal circumstances too. This article highlights the two different types of business structures, each with their own advantages and disadvantages.
A sole trader:
A sole trader is owned and controlled by one person.
There is an unlimited personal liability for the business meaning a sole trader is personally liable for all the business’ debts and obligations, and there is no legal distinction between the owner and business.
Limited company:
Ownership through holding shares in the business.
A limited company’s finances are separate from the shareholders’ or directors’ personal finances. This means that the shareholders are only liable for the amount they have invested in the business, and any personal assets are protected from business debts.
A limited company is managed by directors who are appointed by the shareholders, and it is required to comply with various legal and regulatory requirements.
Key differences between sole trader and limited company
Liability: As mentioned, a sole trader has unlimited liability for the debts and obligations of the business, while a limited company has limited liability.
Taxation: Sole traders are taxed as individuals, and their business profits are subject to income tax and national insurance contributions. Sole traders can take advantage of certain tax benefits, such as deducting business expenses from their taxable income, which can reduce your overall tax liability. However, sole traders may also be subject to higher tax rates than corporation tax. In contrast, limited companies are taxed as separate legal entities, and their profits are subject to corporation tax. Shareholders in a limited company may also be eligible for certain tax credits and allowances, and receive dividends, which are taxed separately, with a £2,000 per annum tax allowance.
Structure: A sole trader business is the simplest and easier type of business structure to set up and manage, and there is no need to register with Companies House or file annual reports. This may limit scalability and potential growth of the business by limiting access to funding and resources. Whereas limited companies are generally more scalable as they can raise capital through the issuance of shares and attract investors to fund their growth. This can help the business to expand and reach new markets.
Financing: Limited companies have more options for financing, such as issuing shares or obtaining loans from banks or other financial institutions. Sole traders may find it more difficult to access funding, especially if they have a poor credit history. This may hinder the future growth of your business.
Management and control: Sole traders have complete control over their businesses, while limited companies are managed by directors who are appointed by the shareholders. Shareholders have limited control over the day-to-day operations of the company.
In Summary, the decision to operate as a sole trader or a limited company depends on various factors, such as the size and nature of the business, the level of personal liability the owner is comfortable with, and the tax and financial implications of each structure.
We at Dragon Argent, are happy to provide professional accountancy, tax and legal advice to help you make the best decision for your business. Book a discovery call by clicking below.
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