Sole Trader Vs Ltd Company: What’s Best For Your Business?

When you are setting up a new business, there are so many decisions you need to make which will impact the future of your business. After all, you want a long-standing, efficient business that makes a significant profit and runs legally. One of the top decisions you need to make is to decide on the legal structure of your business. After all, this could impact your personal finances as well as your shareholders. You need to decide whether you will run the company as a sole trader or whether you will run a limited company. Braant have put together everything you need to know about being a sole trader or opting to be a limited company, so you go into the decision knowing the benefits and negatives of both.

What is a sole trader and what is a limited company?

Before we go through the benefits of both, the first thing you need to know is what exactly each of these are when it comes to business.

A sole trader is a business which is run by a sole person and all responsibility is on this specific person. To the law, your business is in your name and any debts fall on you. This also means you have to deal with any tax yourself.  Over 3.5 million companies are run by sole traders in the UK. Meanwhile, a limited company is a separate entity and is not placed on one particular director or shareholder. Therefore, it is separate from your finances and has its own identity. 2 million companies are limited in the UK.

What are the benefits of being a sole trader?

It’s easier to set up– when you decide to run as a sole trader, there is a lot less paperwork involved in starting up this type of business. The only type of paperwork you will need to complete when becoming a sole trader is the tax return which needs to be completed after the end of every tax year. You must keep note of all your transactions and order this carefully before filling this out. Aside from this paperwork, you can start your business immediately.

You can keep the earnings- As a sole trader, the money comes directly to you. Therefore, as an individual, you get to keep the money you have made once you have put money aside for tax.

You can have privacy- The information of your business is not made public so financial information is kept secret from competitors and others. Also, any personal details are not shared with others.

You keep control- As a sole trader, you get to make all the decisions on your business. There is no need to consult with others who might be a shareholder in your business. You have direct control and can ensure you make the business a success.

What are the disadvantages of being a sole trader?

You are solely responsible: As a sole trader, the responsibility lies on you and you only. Therefore, any important decisions about the business fall on you which can be stressful and a lot of pressure. If anything goes wrong, you are directly in the firing line if you are a sole trader.

You are personally at risk of any outstanding debts: If the company falls into any money problems, it’s your own  funds that you will need to use to pay back the debts. So if you get into large debt, you could be looking at having to sell your own possessions such as your vehicle or property if significant sums are owed as liability rests on you.

You may be seen as less reputable- Some companies might not choose to work with you as a sole trader as they often feel a lot more protected working with a limited company. Therefore, you may struggle to gain clients.

You will have to pay more tax- When you are a sole trader, you have to pay 20-45% income tax and this is significantly more than limited companies who only pay 19%.

What are the benefits of a limited company?

You have a better tax rate – The tax you will have to pay is a lot lower than when you are a sole trader which means you can potentially make more from your company. As well as only paying 19% corporation tax, there are certain deductible expenses and allowances.

You are less liable- Your personal assets are protected when you have a limited company. Everything is done separately so not one person is at risk if your business comes into money trouble.

You have better opportunities for funding-Whether you are hoping for more investors for your business or looking for funding from lenders, you have a higher chance when you are a limited company.

You have a cleaner break from the business- If things go wrong or you want to go in a different direction, it’s much easier with this business structure to end things and start again in the future.

What are the disadvantages of being a limited company?

You have a lot more paperwork- Before you can even get started, there is a lot more paperwork to fill out for your limited company. From registering with Companies House to filling out company accounts, there are a lot of steps to go through before you can begin. And then once you have registered, you need to send them annual accounts and organise tax returns which makes the process complicated.

You don’t have complete control- When you have other shareholders with stakes in the business, you have less control of a limited company. You aren’t solely responsible so have to make decisions  after consulting with others.

You have less privacy- You need to register all your details and your annual accounts with Companies House which means everything can be viewed. Therefore, everyone will know exactly what position your company is in.

What’s the right decision for my business?

You need to weigh up both options when deciding on the right business structure for you. Some companies decide to go down the sole trader route first then once they are making a good profit they switch to a limited company. But for others, the boost in reputation and chance of extra funds from lenders makes a limited company a lot more appealing in the first place. If you want help deciding what is the best option for you, we’d love to help you make that decision, so please get in touch.