Sole Trader vs Limited Company: What’s the Key Difference?
From flexible holidays
to a sense of independence, there are plenty of benefits associated with
freelancing and self-employment. You’ll also get to decide whether you want to
operate as a sole trader or a limited company. This is an important decision as
the structure of your business can have a big impact on your bottom line.
Want to know more
about sole traders versus limited companies? Read on for our guide to the core
differences between each structure, as well as the pros and cons.
Setting up a limited
company means you’ll be operating a separate legal entity that underpins your
business. Size isn’t an issue, with limited companies often fronted by just one
entrepreneur. You’ll be a named director and will be responsible for all
financial and legal decisions made on behalf of your company. It’s also
important to file annual returns and comply with regulations enforced by statutory
bodies such as HMRC and Companies House.
Your own personal
finances are kept entirely separate from the assets and liabilities of your limited
company. Instead, you’ll pay yourself a salary or dividends sourced from
company profits. As your business grows, operating as a limited company
protects your personal assets and safeguards you against any financial
difficulties your company may face.
From a tax efficiency
perspective, limited companies pay Corporation Tax instead of Income Tax which
can often be more profitable. You’re also eligible to redeem corporate allowances
and tax-deductible costs. The benefits of operating as a limited company mean
around 1.9 million Brits currently choose this business structure.
As a sole trader,
you’re categorised as self-employed and run your own business as an independent
entity. After paying taxes you’re entitled to keep all profits made from your
business activities and are personally responsible for any gains or losses. The
structure is simple, with minimal paperwork and relatively straightforward annual
self-assessment tax returns.
All you need to do to
set up as a sole trader is register via the Gov.uk website. Sole traders also
enjoy more privacy than limited companies and incorporated businesses, who are
required to list details via Companies House.
When it comes to
downsides, sole traders are not considered separate entities under UK law which
means you have unlimited liability. So, if your business slips into debt you’re
personally responsible and could lose personal assets. Raising cash can also be
difficult as banks and investors are reluctant to finance sole traders and tend
to favour limited companies and established businesses. This can hinder your expansion
opportunities and force you to remain a small, independent business.
Tax rates can also be
an issue, with sole traders often hit with higher levies once they hit a
certain earnings threshold. As a result, once you start climbing the income
ladder it could be worth setting up a limited company to maximise your profits.
Despite tax pitfalls, there’s plenty to love about the sole trader structure,
which is why an estimated 3.4 million Brits operate under this model.
to conduct business as a sole trader or a limited company will depend on the
unique structure of your business and its exclusive needs. Talking to a
professional accountancy firm to discuss your options and weigh up the pros and
cons is one of the best ways to find a match.
At UWM Accountants, we offer professional business planning
services for individuals and companies across the UK. In short, our team of Leeds-based accountants can help you
succeed with the best strategy for your business going forward.