One of the most common questions we get asked when a business is in the start-up stages is ‘Should I set up as a sole trader or a Limited Company’?
There is a no definitive answer to this as the truth is, both have their advantages and disadvantages but ultimately, it comes down to your future plans.
What is the main difference between a sole trader and a limited company?
In simple terms, a sole trader owns the business and is solely liable for all losses and debt accrued. A limited company is made up of shareholders who each have limited liability so there can be less risk to the individuals.
As a sole trader
- You are personally responsible and liable for your business and its finances
- You can keep all profits after tax liabilities have been fulfilled
- You are self-employed which means you only need to complete a simple tax return at the end of the year
The most common industries for sole traders are hairdressers, electricians, plumbers and similar trades.
It’s easier to be a sole trader than a limited company. There is less paperwork and administrative tasks. However, there is no-one to share accountability with so can be a lonely process.
As a limited company
- You set up a private organisation to run the business made up of shareholders
- The business has its own identity, and each shareholder has limited personal liability
- You can pay a combination of salary and dividends as Directors of the business which can be more tax efficient
As a Director of a Limited Company, you are employed so you will not have to submit a self-employed tax return at the end of the year. However, you do need to register for corporate tax and although this can be a better rate, comes with hefty fines if deadlines are missed.
A benefit to being a Limited Company is that once you have registered on Companies House, no other business can take that trading name. The disadvantage is that all Directors should be declared on Companies House and finances (including personal) will be publicly displayed.
Limited companies come with more administrative tasks and can be more complicated, so an Accountant or Bookkeeper is often needed. This can obviously bring in extra costs to the business.
In the end, it comes down to whether or not you are planning on expanding in the future and how simple you want to keep things.
A sole trader can take all profits as income but will likely pay more tax. A limited company can split salary and dividends to reduce the tax implications but will have far more paperwork to complete.
As we said, both have their advantages and disadvantages and before making this decision, it is strongly advisable to speak to an Accountant or Bookkeeper first.
As always, if you need any help, #JustASBK.