Business Advisory

Sole Trader v Limited Company

Bright Beany By Katy Dales

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Do you want to set up a limited company, or operate as a sole trader?

When setting up a new business, choosing a legal structure is an important and often difficult decision. Read on to understand the differences between the two!

What's the difference between a sole trader and a limited company?

It is important to understand the difference between operating as a sole trader and a limited company.

As a sole trader, the self-employed business owner and the business is treated as a single legal entity. This means that a sole trader is responsible for both personal and business debts, and personal assets such as a house and car could be at risk if something goes wrong.

A limited company is incorporated at Companies House, and is a legal entity in its own right. This means the assets and profits belong to the company rather than the directors or shareholders.

Is it better to operate as a sole trader or a limited company?

The best option for you is dependent on your personal circumstances and the size of your business, as there are both advantages and disadvantages to both types of structure.

Setting up as a sole trader is the easiest way to set up your business; it involves limited paperwork initially and whilst you are running your business. However this may not be the most tax efficient way to operate, depending on your size.

Operating as a limited company is more complex, and involves additional costs and paperwork. But it can be more tax efficient, and is a separate legal entity giving you more protection as an individual.

Sole Trader – AdvantagesSole Trader - Disadvantages
Immediate start - no requirement to register with Companies House so you can get started with your business as soon as you are ready.Unlimited liability - you take on all the risks associated with running a business and hold all the responsibility for its debts. You may need to sell off personal assets such as your house to pay those debts.
Minimal paperwork – you will only need to file a self-assessment tax return annually, and keep a record of your sole trader accounts.Limited funding opportunities – accessing business finance can be difficult as lenders and investors tend to favour limited companies.
Control over your business: You are the only one in the business so you can make all the decisions without needing to consult shareholders.Can be less tax efficient - sole traders pay 20%-45% income tax and Class 2/4 national insurance on profits, regardless of what cash they physically withdraw from the business bank account. 
Limited companies pay 19% corporation tax up to £50k profits and 25% above £250k, with a blended rate in between (from April 2023). Therefore when the business is doing well, and you can afford to leave some of the profits in the business, it may be time for you to set up a limited company.
Profits are yours - you run your business as an individual and retain all the profits that you make after you’ve paid tax.Less credibility - some organisations might choose to not work with sole traders due to the lack of legal protection compared to limited companies.
Extra privacy - financial information remains private, unlike that of limited companies which is accessible by anyone on Companies HouseNo protection over your business name: Unlike limited companies, your business name is not protected, meaning anyone can trade under the same name as you which could cause confusion

Limited Company

Limited liability protection - A limited company is legally separate from shareholders/directors so you are not personally liable for any losses made by the business. If the company is ever sued, your personal assets, such as your house and car, cannot generally be seized to pay the debt, unless, for example, you have given a personal guarantee to a company creditor or you have deliberately 
not paid your tax debts.
More paperwork – a limited company has to file: 
- Annual accounts 
- Confirmation statement 
- Company Tax Return
- Director’s tax return (in most cases) 

The company also needs to be registered at companies house and follow PAYE (Pay as You Earn) procedures for payroll.
Potential tax savings – there could be more tax savings when operating as a limited company. Limited companies pay 19% corporation tax up to £50k profits and 25% above £250k, with a blended rate in between (from April 2023). 

They also qualify for a wider range of allowances and tax deductible expenses. You can operate a payroll, paying yourself a tax efficient salary, and withdraw dividends from the business which don’t attract National Insurance and have a lower tax rate than a salary.
Less privacy - Limited companies have less privacy than unincorporated businesses because the company accounts and other documents they file with Companies House are available for anyone to view.
Investment opportunities – you have a wider range of funding opportunities open to you as a limited company
More credibility – running your business as a limited company can encourage more confidence and trust among suppliers and customers.

Can I start out as a sole trader, and then switch to a limited company?

Absolutely! Operating as a sole trader is a great option for many small business owners when setting up an initial structure. As your business grows, there comes a point where you may decide to switch to a limited company.

Switching from sole trader to a limited company can be a difficult decision, so it’s recommended that you discuss your options with us before proceeding.

Get in touch with Bright Beany, and see how we can help you start your journey.

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