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What is the difference between a Limited Company and a Sole Trader?

For those new to setting up a business, it can be difficult to know how best to structure one.

To help, here is a simple guide to the differences between a Company and a Sole Trader.

What is a Limited Company?

Unlike a sole trader a Limited Company is a legal entity and separate from that of its Directors and Shareholders. This still remains true whether the Limited Company is run and operated by one person or by several Directors

What is a Sole Trader?

Sole traders are classed as being self-employed and thus the ‘sole owner’ of the business. These are extremely easy to set up.

You can set up as a Sole Trader via the HMRC website, or by contacting them directly.

Limited Company vs Sole Trader

There are many advantages and disadvantages for each legal structure and while being a Sole Trader is perhaps the simplest way to get your business up and running, there are also disadvantages. Below we have listed the advantages and disadvantages of setting up a Sole Trader vs a Limited Company.

Advantages of being a Sole Trader

• Easy to setup: Set up is quick and easy with relatively little paperwork required. Once established, you will need to complete an Annual Self-Assessment Tax Return.
• Less statutory work: Your business does not have to register with Companies House.

Disadvantages of being a Sole Trader

• Unlimited liability: As Sole Traders are not viewed as a separate entity, if the business encounters financial difficulties, the owner is liable for the debts and could lose personal assets such as their house.
• Difficulty in raising finance: Banks and Building Societies tend to prefer Limited Company structures resulting in difficulty in raising finance.
• High tax: HMRC treat business Income and Expenditures as one, so once your business reaches a certain level in the business, a Limited Company Structure would have been more tax efficient.

Advantages of being a limited company

• Limited Liability: The legal distinction between you and your business means your personal finances and assets are protected should the business run into financial difficulties.
• Tax Advantages: Limited Companies generally prove to be more tax efficient since you pay Corporation Tax on profits, you can also claim a larger range of allowances.
• Registered Limited Company name: Once your company name has been registered, no one else can claim it.
• Prestige: A Limited Company comes with a certain level of calibre and trust, which gives you advantages you may not have as a Sole Trader.

Disadvantages of being a Limited Company

• More responsibility: additional paperwork, in the form of Annual Company Tax Returns and Annual Accounts.
• Time and Cost: The extra paperwork and tax reporting requirements can end up being more expensive and time-consuming, however an accountant from Accounting Solutions Manchester can manage the paperwork on your behalf.
• Less privacy: Information of limited companies are listed with Companies House, and this information can be accessed by anyone.

Summary

Before making a decision, it is important to weigh up all the differences between operating as a Limited Company vs Sole Trader. The most suitable structure will ultimately come down to your preferences, your type of business and your specific situation needs and requirements.

Accounting Solutions Manchester can help you choose the most suitable business structure based on your goals, tax position, and future plans. Call our experienced team today on 0161 879 7175 for a free, no-obligation consultation.