What’s the difference between a Sole Trader and a Limited Company?

Limited Companies & Sole Traders – what’s the difference?

Today, more of us are choosing to work for ourselves. In fact, over 5 million people are currently registered as self-employed in the UK, a 25% rise since 2010.  (Statista 2021)

The first decision any self-employed person should make is whether to register as a sole trader – or form a limited company.

But what’s the difference between the two – and which is right for you?

What is a sole trader?

A sole trader is a self-employed person whose business is registered in their individual name.

Legally, a sole trader and their business are considered one entity. This means that as a sole trader – even if you hire employees – you call the shots and are responsible for all decisions relating to your business.

You’re also responsible for any debts and losses incurred by the business. Unfortunately, this does mean that your personal assets (such as your house) are at risk should your business end up in lots of debt.

Advantages of setting up as a sole trader include how easy it is. Anyone earning over £1000 annually can register as a sole trader on HMRC’s website. Accounting for sole traders is also easier than the admin involved with running a limited company – although an accountant is still advisable to keep sole trader books in good shape.

Another benefit of sole trading is you keep all profits after tax (assuming you’ve paid any employees their salary first) which is attractive to anyone who doesn’t fancy splitting earnings with directors or shareholders – or being obliged to plough money back into the business. You can find further details about sole traders in our post here.

What is a limited company?

A limited company is a business which is owned by, or made up of, more than one party. These parties are usually at least one director and at least one shareholder. Contrary to popular belief, a limited company can have one person as sole director and shareholder, so is still an option for individuals.

Unlike a sole trader, those associated with a limited company are considered legally separate from the business and have what’s called ‘limited liability’. This means that should the business go into debt, for instance, it will be the legal obligation of the business – not you personally – to pay up.

A key benefit of a limited company is that it’s easier to expand and scale your business than as a sole trader, as capital can be raised via share sales.

Further, a limited company can prove more tax efficient for you as your business grows. By paying yourself a modest salary alongside dividends (shareholder profits), you’re avoiding paying too much income tax. This is perfectly legal and most limited company directors do this.

However, running a limited company is more complicated than operating as a sole trader. You’d need to register on Companies House, then produce detailed accounts, tax returns and confirmation statements to be made public annually. This means prospective clients and business partners can check up on the state of your business’s finances at any time. It’s vital to find good limited company accountants to help you navigate the world of tax and accounting.

Looking for support?

If you're starting out or need some advice about becoming a sole trader or limited company, give our friendly team a call today. No matter your situation, we'll be able to provide expert guidance and accounting services to support your business.

Which one is right for you?

If your business model relies on just you – and you have no intention of scaling up – becoming a sole trader could be the right option. For instance, a taxi driver or fitness instructor who doesn’t intend to hire staff or raise capital.

However, if you have plans to expand your business or raise capital, you may consider a limited company. For example, a coffee van vendor with a view to operating an entire fleet of caffeine-dispensing vehicles in the future might be better suited to the limited company model.

Whichever option you choose, it’ll be plain sailing with an accounting service. An accountant can offer practical support and invaluable tax advice for a fixed monthly fee, taking the guesswork out of self-employment.

If you’d like to learn more about the accounting services we offer for both sole traders and limited companies, contact our team today!

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