By Lynne Gowers on 6th August 2018

Sole trader or Limited Company – what’s right for me?

If you decided to take the plunge and be your own boss, one of the first decisions you’ll need to make is how to structure your business.

A lot of people, when first starting out, tend to operate as a sole trader business.
There’s a lot to be said for that; it’s a very simple business structure, it’s easy to get started and there’s minimal paperwork involved.

However, it may not be quite right for you or your business, particularly when you become more established, and that’s when many business owners throughout the UK consider taking the step of registering as a limited company.

Difference between sole trader and limited company

Here we outline some of the key differences between structuring your business as a sole trader and as a limited company.

Personal liability

Sole traders have unlimited liability, as they are not viewed as a separate legal entity. That means if the business gets in to debt, then the business owner is personally liable, so if things go wrong your personal assets could be at risk.

Unlike a sole trader, a limited company offers limited liability, as incorporation forms a legal distinction between the business owner and their business. This means your personal assets are not exposed – you only risk what you put in to the business.

Tax efficiencies

While some prefer the simplicity of operating as a sole trader, when you reach a certain level of income, it may not be the most efficient way to run your business.

In the most general terms, limited companies pay corporation tax, rather than income tax on their profits. The directors and employees pay income tax on their salaries and owners pay dividend tax on the dividends they take from the company.

As well as that, with the right tax advice and savvy financial planning, there’s a wider range of allowances and tax-deductible costs that a limited company can claim against its profits.

Having said that, you shouldn’t consider running a limited company expressly for tax purposes. HMRC has ways of checking for this and will be quick to act if they think that’s what’s going on.

Scope for growth

Operating as sole trader is the obvious, simple business structure for businesses starting out, but it presents limited scope for growth.

If you have aspirations to expand your business and increase its value, a limited company provides the flexibility to do that, allowing you to issue new shares, take on employees and make new directors as your company gets bigger.

Funding can also be a significant barrier to business growth. Lenders tend to view limited companies as more established and therefore less of a risk, so it can be easier to secure investment if you choose to incorporate your business.

Company name and prestige

This is all about perception. Engagers and customers often have more confidence in dealing with a limited company business.

Aside from that, is the question of company name. Once you have incorporated your company, no-one can else can use that name, in contrast to sole traders who aren’t offered the same protection. If you are thinking in terms of a future-proof business, and perhaps a legacy to pass on to your children, it may well be worth considering registering as a limited company.

Sole trader vs limited company – at glance

Advantages of a limited company

  • Your company is a completely separate legal entity from you as a business owner
  • You have the reassurance of limited liability
  • Having a limited company may provide a more professional image
  • You can take advantage of certain tax efficiencies
  • It may be easier to secure business funding as a limited company
  • It is easier to grow the business

Advantages of being a sole trader

  • It is simple and cost-effective to start up and run
  • There a fewer legal responsibilities and duties than a limited company director
  • You can take money out of the business as and when you need to
  • The details of your business are kept private, ie. they are not in the public domain
  • Any trading losses can be set off against your personal tax bill (for up to the previous 3 years)
  • It’s easier to close down the business

Disadvantages of a limited company

  • It may be costly to establish
  • You may not be able to register a limited company for example if you are an undischarged bankrupt
  • Details of the company are a matter of public record
  • You need to have an address in the same part of the UK where the company is registered
  • There are more legal and tax responsibilities involved
  • Accounting and filing requirements are more complex
  • Loans to participators in close companies give rise to tax charge

Disadvantages of being a sole trader

  • You have unlimited liability as there is no legal difference between business and personal finances
  • It can be difficult to raise startup capital
  • It may not be as tax efficient as running a limited company
  • All taxable income is liable for NIC and Income Tax
  • The business may be perceived as smaller or less credible than a limited company

Sole trader vs limited company FAQs

Q. Going from sole trader to limited company

It is possible to change your sole trader business to a limited company and this can be done quite quickly. You will need to apply online to Companies House. Alternatively, an accountant or company formations agent can incorporate your business on your behalf. There are tax considerations if your existing business

Q. What are the benefits of changing from sole trader to limited company?

The reason most people choose to change from sole trader to limited company is the fact that a limited company is a separate legal entity from its directors. This offers limited liability and protection to personal assets should the business fail.

Q. Can you change from a limited company to a sole trader?

While this is unusual, you might want to change from a limited company to a sole trader. An example would be if you wanted to downsize the business. Operating as a sole trader is a much simpler structure and involves less admin. However, the correct legal procedure for closing down the limited company must be followed and there are significant tax matters that will need to be considered – especially capital gains tax.

Q. Can you be a sole trader and limited company at the same time?

You can be, but you will need to prove to HMRC that you are not using the arrangement purely to avoid tax, eg. to get around being VAT registered for one of the businesses. You should always get the professional advice of an accountant if you are considering running a sole trader and limited company business at the same time.

Choose the right road for your business

Running a limited company comes with certain responsibilities and legal obligations but likewise, the rewards can be great. It’s vital to weigh up the differences between sole trader and limited company, as the structure you choose impacts everything from profits to paperwork.

The right accounting support for your business

However you choose to operate your business, you need the right accounting technology and support to help you manage your finances and meet your obligations.

We have a range range of specialist accounting services for contractors and freelancers, sole traders and small and growing businesses.

If you are not sure what’s right for you, just get in touch with the Boox team. They’ll ask a bit about you and your business and help you decide.

Written by Lynne Gowers
Disclaimer Although we attempt to ensure that the Information contained in this publication is accurate and up-to-date at the date of publication it may not be comprehensive, we accept no liability for the results of any action taken on the basis of the information they contain and any implied warranties, including but not limited to the implied warranties of satisfactory quality, fitness for a particular purpose, non-infringement and accuracy are excluded to the extent that they may be excluded as a matter of law.

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