Last week we wrote about the expenses you can claim as a Sole Trader and Limited Company, but it got us thinking, what if you haven’t decided how you will operate your new venture? What if you don’t know the difference between the two. Wonder no more! In this week’s blog post, we’ve put together a quick read to help you understand the differences.
A sole trader is a self-employed person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses. It’s the simplest business structure out there – which is probably why it’s the most popular.
A limited company is a type of business structure where the company has a legal identity of its own, separate from its owners (shareholders) and its directors. Even if a company has only one person involved with it and that person is the only shareholder and the only director, the company is still a separate legal entity in the eyes of the law. Now we know what the difference is between the two, let’s look at the benefits of each type.
Sole Trader Advantages:
- Easy to set up and little paperwork, other than an annual self-assessment tax return.
- Greater privacy as you’re not required to register on companies house
Sole Trader Disadvantages:
- As a Sole Trader, you’ll have unlimited liability for the business. The business is not viewed as a separate entity by UK law. This means that if the company gets into debt, the business owner is personally liable, which means you could lose personal assets if things go wrong.
- Raising finance can be tricky. Banks and other investors tend to prefer limited companies
- Tax rates on sole traders are higher than those on limited companies. So when you reach a certain level of earnings, it might not be quite as lucrative to stay a sole trader.
Limited Company Benefits:
- As a limited company, you’ll have limited liability. Why? Because incorporation forms a legal distinction between the business owner and their business. This means that personal assets aren’t exposed.
- Limited companies can be more tax-efficient than sole traders. Rather than paying Income Tax, you’ll pay Corporation Tax on the business profits. And as things stand, this offers a kinder tax rate.
- As a limited company, you’re exposed to a broader range of allowances and tax-deductible costs that you can claim against business profits.
- Once you register your company name, nobody else can use that name. Unfortunately, Sole traders are not the same protection.
Limited Company Disadvantages
- As a limited company, you’ll be responsible for what’s called the Director’s Fiduciary Responsibilities, which outline what a limited company director must do legally. You’ll need file a yearly annual return for one, as well as annual accounts.
- There are more complex, time-consuming accounting and administration requirements.
- The accountancy costs are more expensive. A professional accountant might be required.
- Unlike sole traders, information on your business can be found via Companies House, details on directors and your company’s earnings are required to be shown publicly.
So there you have it, both business types have some appealing advantages. It’s vital to weigh up these difference’s because the structure you choose could impact on everything from profits to paperwork. Don’t rush into any decision and speak to an accountant if you’re unsure, their expertise can be invaluable when it comes to the tax facts. Lastly, be sure you consider your insurance needs as regardless of which structure you choose, either type of business will bring its unique risks and you’ll want to make sure you’re protected.