Starting a business requires careful consideration of various factors, including the business structure. The choice between a sole trader and vs limited company is a common decision that entrepreneurs face. Understanding the difference and weighing the pros and cons of each structure can help you make an informed choice.
Sole Trader
A sole trader is an individual who is self-employed and runs the business. There is no legal separation between the business and the owner, so the owner is personally responsible for both the profits and the liabilities of the business.
To become a sole trader, you simply need to register with HMRC and complete a Self-Assessment tax return. You are required to do this if you earn more than £1000 from self-employed business activities in a tax year. Registering as a sole trader can also be necessary for proving self-employment for benefits or making voluntary national insurance payments.
Advantages of being a Sole Trader:
- Lighter administrative burden with only an annual Self-Assessment tax return required (although this may change in the near future)
- Maintains privacy, as there is no obligation to disclose information on public registers
- Keeps all business profits after paying tax
Disadvantages of being a Sole Trader:
- Personal liability for any business losses
- Reliance on personal credit rating when borrowing money for the business
Limited Company
A limited company is a separate legal entity from its owners, who are known as shareholders. The owners can also act as directors, responsible for the day-to-day running of the business. Setting up a limited company is relatively straightforward and inexpensive, with specific requirements for recording rules for running the company in the articles of association.
Advantages of a Limited Company:
- Limited personal liability
- Potential for tax-efficient payment of salary and dividends
- Ability to claim more business expenses
- Business credit rating can help with borrowing opportunities
- Can enhance credibility, especially with larger companies
Disadvantages of a Limited Company:
- Higher administrative burden with required company accounts and information submitted to Companies House
- Information on directors and other details are publicly available
