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There are a number of differences between operating your business as a sole trader or through a limited company.  Here we discuss the differences and the pros and cons of both.

Liability

Sole traders are self-employed individuals, who are the sole person in their business. As a sole trader, you have total control over any business assets and profits. However, this also means you are personally liable for all the debts of the business.  A limited company is a separate legal entity, distinct from you as its owner (or shareholder). This distinction is important as it gives the owner ‘limited liability’, which means your personal assets are protected if the company experiences financial difficulties. This reduces some of the risk of creating a business.

Tax Position

Very simply, sole traders pay income tax on their profits.   Limited companies are often more tax-efficient structures than sole traders. For instance, a limited company pays corporation tax on profits, which is usually lower than the income tax rates that sole traders pay. Also, company directors can choose to take a small salary and receive additional income as dividends, which can lead to a lower personal tax bill for the directors.

Administration

Administratively, the paperwork for sole traders is more straightforward, whilst a limited company has to register with Companies House and file annual accounts and reports.  Also should you decide to close-down the business, it is more complex and there is more admin for a limited company.

Responsibilities

Directors of a limited company have legal responsibilities to ensure the company is run lawfully. Failure to meet these obligations can result in penalties or disqualification as a director.  These responsibilities must be taken seriously by directors.

Raising Capital

It can be easier for a limited company to raise capital.  Some forms of finance require a business to issue shares, which would require restructuring to a limited company.

Others’ Perception

Some customers and suppliers see sole traders as less established or less stable, compared to a limited company, which could impact your ability to attract business or deliver the services to your current customers.

Business Strategy

If you have plans for steady growth and expansion, which may require more employees, or need to regularly engage expertise or additional resources, or secure investment, you should consider incorporating the business to a limited company.

Continuity

As a limited company has a separate legal entity from its owners, it can continue to exist even if the original owners leave the business. This means you can create a legacy for the business.

Choosing between a sole trader and a limited company

It can be a difficult decision to choose between a sole trader and a limited company structure.  You may like to ask yourself some questions to help you decide:

• Do I want to have complete control over my business operations and retain all the profits? A sole trader may be the best option for you.
• Am I looking for a level of legal protection and to limit personal liability? Then a limited company may be best.
• Do I plan to rapidly scale and grow the business? A limited company could support growth if you need to access further funding.
• Do I want to set my own hours and work-life balance? A sole trader could be the right route.

Of course, you can always start as a sole trader with the idea that you may decide to incorporate the business as a limited company at a later stage.

Castletons Accountants