Sole trader or limited company
Posted on 8th October 2018
Sole trader or limited company? The one thing every business owner has thought about in detail and looked financial implications right? Well probably not, and there is no right answer that suits every business. But you should really compare the two routes and see which one is best for you.
Every business – no matter how big or small – must have a legal structure, with the bulk choosing to be either a sole trader or a limited company. An estimated 3.4 million operate as sole traders, with 1.9 million operating as limited companies – so what is the difference between the two? And which could be the best fit for your business?
First – some definitions
This is best known as a self employed person. You are the sole owner of the business. In real terms effect you are the business as there is no distinction between you personally and the trade. It is the simplest form and you must register your sole trader status with HMRC
A limited company is a business structure that is its own legal entity. By this we mean it actually exists in its own right and it trades. So no longer are you the business – but the business is the Limited company. It is owned by its shareholders and it uses its directors to run or manage it. This is the case even if you are bother the shareholder (its owners) and the Director (manager) of the business.
Which one is right for you?
This will depend on your individual circumstances (and will not just be which is the most tax efficient!). Both come with advantages and disadvantages, so lets look at a few.
Sole Trader Advantages
Simple to set up – less reporting requirements than a limited company
Simple accounts calculations and self assessment tax return
Greater privacy – as no need to disclose accounts publicly (at Companies House)
Limited Company Advantages
Limited Liability – you are distinct form the business – the debts are with the business and with the business alone (so your assets are protected) as long as you are not wrongfully or fraudulently trading.
Tax – Broadly speaking Limited Companies can be more tax advantageous
Business name – Once you’ve registered a company name nobody else can use it, in contrast to sole traders who aren’t offered the same protection so easily
Sole Trader Disadvantages
Riskier if taking on debt – No distinction between you and the business so any business debts are your debts and if not paid are your liability
Tax rates – Can be less tax advantageous than Limited Company
Limited Company Disadvantages
Increased responsibility and administration – Being a director brings with it Directors Responsibility and more reporting via Limited Company accounts and tax returns (Both company and potentially individual)
Increased costs – Inevitably with additional filing burdens brings additional costs
Which one is right for you may not be immediately obvious. A lot will depend on your motivations: do you hate paperwork and want the simplest route, are you looking to expand and need finance, getting maximum profits and least tax, and a host of other considerations . It may not all be money based or Money may not come into the consideration. Or money could be your only consideration!
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