Sole trader or limited company: which is best for your business?

Sole trader or limited company: which is best for your business?

You probably went into business knowing that you would need to develop certain skills –– maybe brush up on your content marketing, or get a good sense of financial planning. But one vital skill most people overlook when they first get into business is decision making.

How do you choose a name for your business? Which social media channels are you going to use? Will you create your own logo or hire a designer? These are the fun decisions, the exciting ones.

It’s all too easy to focus on these aspects of running your business and neglect the more serious decisions; those that involve tax, finances and the dreaded world of regulations. Such as…


Should you operate as a sole trader or as a limited company?

We know that this is a daunting topic for new business owners, but it’s important you don’t put off making this particular decision. If you do a bit of research now, you can be sure you are making the right choice for your business as it is now, and, as it will be in the future.

To make things a bit easier for you, we’ve put together a brief overview of both options to help you figure out which one is right for you and your business.


Sole trader

This is a common route for many self-employed people.

It’s relatively easy to set up in business as a sole trader, and it is the more straightforward of the two options. There are fewer regulations with which to comply and, unless you cross the VAT threshold, you only have your yearly self-assessment tax return to deal with.

Sole traders enjoy greater anonymity than company directors do — they are not required to make their accounts public. They can also remove money from the business without tax implications, provided they leave enough to cover their tax bill.

This makes it a great option for those who are dipping a toe in the water of self-employment, particularly those who are operating on a part-time basis, perhaps alongside other employment.


The downside:

Choosing the sole trader route is not without its disadvantages, though. As a sole trader, you are the business. You will be held liable for any debts and financial losses. You will also be personally liable if anyone decides to sue the business (unless you have insurance) and your personal assets, including your house, could be at risk.

If you have grand plans for business growth, it’s also worth considering that banks and investors are often hesitant to invest in sole traders. They view limited companies are more secure ventures. Sole trader status can also hinder your attempts to portray a professional image and many larger firms make it a policy to trade only with limited companies.


Limited company

Without a doubt, becoming a limited company is not the easy option.

It is a more complex process; there are more regulations to follow, more legal obligations and more paperwork. If you choose this route, you will definitely need to employ an accountant and preparing the accounts for a limited company can be more costly than preparing a sole trader’s accounts.

Limited companies enjoy less privacy than sole traders do. All business information, including the accounts must be made public via Companies House. It’s also worth noting that it is harder to borrow money from a limited company — any financial withdrawals are subject to tax costs.

It’s not all doom and gloom for limited companies though, and many consider that the added advantages outweigh the additional regulations and paperwork.


The advantages:

Overall, limited companies pay less tax.

They are subject to corporation tax, which is currently set at 19% but due to fall to 17% by 2020.

Company directors also benefit from better pension deals, and more tax-deductible allowances than sole traders do. They can draw income from the business in the form of dividends, which aren’t subject to National Insurance contributions. Operating as a limited company offers an added degree of protection that sole traders lack.

Your company name, once registered with Companies House, is protected and no one else can trade under the same name, or one deemed to be similar. And, unlike sole traders, company directors are viewed as separate entities from the business. This means that they are not personally liable should the business suffer financial losses.

If you want to grow your business, secure funding or add employees, you may find that becoming a limited company allows you more development opportunity. It can also be easier to transfer ownership of a limited company.


How do you choose the one that’s right for you?


Look ahead.

Consider your next business move. It can seem premature to think of the future and of business growth when you’re still wondering where the next client will come from, but it is important to look ahead.

If you’re planning to expand at some point, take on additional staff, or compete for larger contracts, it might be better to consider becoming a limited company and putting the necessary legal structures in place now. Conversely, if your future plans are suited to working as a sole trader, stick with it. Don’t be lured into the idea that you need to form a limited company.


Get professional help from your accountant.

Many people don’t realise that accountants are ideally suited to giving business advice. You can benefit from their professional training and experience and the fact that they can offer impartial and unbiased advice. Often you are too close to your own business and talking over your plans with someone else can help you gain real clarity on which path to take. There really is no definitive answer here.

Whether working as a sole trader, or as a limited company, is the best option for you will depend on many factors, present and future. Do your research, consider your options, and seek professional advice from your accountant if you can. Then, with the proper legal structure in place, you can get back to all of those other decisions you need to make!


Whether you’re a sole trader or a limited company, we’re here to help, with packages designed for every business, large and small. Find out more here.

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