Sole Trader or Limited Company – Which one is best for you?

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Choosing to register your business as either a sole trader or limited company has various advantages and disadvantages associated with both. For example, you may decide that being a limited company has more of a safety net attached to it, but there are more responsibilities when compared to just being a sole trader. It can be an exercise in indecision for business owners to choose, so between sole trader or limited company, which is best?

Although choosing to register as a limited company includes more responsibilities for a business owner, limited companies are often considered safer than sole traders because there is less risk to the business owner if the business fails. However, it should be noted that sole traders are simpler and easier to operate.

Are you trying to decide between sole trader vs. limited company? Do you want to keep things really simple or are you ready for some more responsibility? Do you want to run your business with as much financial security as possible?

In this article, we will answer all of these questions in detail to help you make the best decision on the best option between sole trader vs. limited company. Read on to find out which option is best for you and how we can help.

What Is a Sole Trader?

In the UK, we commonly refer to those who are self-employed and running their own business that they completely control as sole traders.

The sole trader is best understood as the end-all, be-all of their own personal business. A sole trader controls their own workflow and revenue, sets their own schedule, negotiates all terms and conditions with clients if they contract work for a client, and also handles their own self-assessment tax each year with HMRC.

Running a business as a sole trader is perhaps the simplest form of navigating the workforce as a self-employed person. Being a sole trader is also very popular since running your business solely depends on you and the amount of work you want to put into it.

All one has to do to become a sole trader is to register their business through this portal. Once registered, you are officially a sole trader and are in proper accordance with HMRC concerning your tax requirements.

What Is a Limited Company?

A limited company can be best understood through two different examples. The essential definition of a limited company is that of a business entity that is registered with the government and has its own legal identity in terms of security and financial risk concerns.

A limited company is defined as this rather there are multiple owners or managers with the business or even just one person. The company is always the entity in question and never the owner.

Limited companies also require a great deal of public transparency and you must register your business with Companies House.

Sole Traders vs. Limited Companies

As you can see from this comparison chart, there are both advantages and disadvantages for both sole traders and limited companies.

Sole Trader Limited Company Comparison Field
Yes Yes You Run Your Entire Business
Yes Yes Easy to Register
Yes Yes Allows You to Work With Different Clients and Work Fields
No Yes Allows Both Salary and Dividend Payments
No Yes Corporate Tax
No Yes Limited Liability Safety
No Yes Public Transparency Required

Running a limited company comes with many security advantages in terms of finances and revenue and status within Companies House. However, you do lose some freedoms that are available with simply being a sole trader.

A good point to remember is that sole traders are ideal for small workloads, and limited companies are more attractive for large volumes.

Let’s take a more in-depth look at both through pros and cons of each.

Sole Trader Pros & Cons

Being a sole trader removes a lot of headaches, but you will miss out on some risk assessment advantages that come with being a limited company. Here are the pros and cons of being a sole trader.

Pros:

  • Minimal responsibility. Being a sole trader is incredibly easy. All you have to do is register with HMRC and set up your business as complying with submitting an annual self-assessment tax return. You are the sole boss of your business purview as a sole trader.
  • Versatile business structure. As a sole trader, your business structure is whatever you want it to be. All you have to ensure is that all your tax is levelled and properly submitted to HMRC.
  • Privacy. A limited company is always going to be made available through the public record with Companies House. As a sole trader, you do not have to worry about your business details being made available to the general public, only HMRC.
  • No Corporate Tax. As a sole trader, you do not have to concern yourself with paying corporate tax unlike what is required with a limited company.

Cons:

  • Tax Rates. As a sole trader, the more revenue that your business makes, the higher your tax rate will likely go. Limited companies get many more tax benefits when compared to sole traders.
  • Unlimited liability. As a sole trader, both you and your business are considered to be one and the same. This means that there are no legal distinctions between you and your business, and if debt begins to accumulate, it affects both you and your business. The government has the right to seize personal assets and revenue to satisfy the debt of your company.
  • Diminished financial capital. As a sole trader, banks and investment institutions generally do not want to take the risk of doing business with this type of business entity. They are much more receptive to limited companies.

Limited Company Pros & Cons

Limited companies have much more responsibility than what is seen with sole traders, but the pay-off can be found in many more financial and status-based advantages that also come with some level of financial security.

Here are the pros and cons of being a limited company.

Pros:

  • Limited liability. A limited company has limited liability in terms of financial risk with the company in question. Your personal assets are never in danger if the limited company goes into debt, and you will likely only end up losing what you put into the limited company up until that point.
  • Sole ownership of a company name. As a limited company, your company’s name will always be registered within the database of Companies House. No there company will be able to choose this name which is a benefit not available for sole traders.
  • Tax. One of the biggest advantages of running your business as a limited company is the significant tax savings you could make. Limited companies are subject to corporation tax, which is currently 19%. If you are a director and shareholder of a limited company, you can choose to take a small salary and draw most of your income from the business in the form of dividends.
  • Tax incentives. By doing this, you can minimise the number of national insurance contributions you have to pay and only pay dividend tax on the income you make from the company, rather than income tax on all your earnings.
  • Image. In some industries being a limited company can help improve your professional image by giving credibility, and making you a more attractive business to work with.

Cons:

  • Increased legal obligations. A limited company must meet certain legal obligations as established by Companies House.
  • Loads of paperwork. A limited company will routinely face large amounts of paperwork and reports needing to be completed to remain in good standing legally. This can be quite time-consuming, but hiring an accountant can remove this disadvantage.
  • Full business transparency. As mentioned, you will have to register your limited company with Companies House. This opens up your business to the full view of the public whether your business is thriving or struggling.
  • Fees and multiple filings. A limited company will have to pay an initial fee to apply for filing through Companies House. There are also multiple tax filings that are required including the filing of a company return as well as annual accounts that also must be recorded and properly filed.

Sole Trader vs. Limited Company: Which Is the Best Overall?

With all of the pros and cons between sole traders and limited companies established, which is truly the best option?

If you want to be a sole trader and you expect to only have a rather small amount of clients or a direct business model, this entity can be a rewarding and freeing choice. But the larger your business becomes, the riskier it can be to remain as a sole trader.

There is quite a bit of responsibility that goes into being a limited company. There are multiple tax returns that will need to be followed as well as legal obligations set out by the government that you must always remain in compliance with.

Ultimately, we recommend choosing a limited company if you expect your business to grow at an exponential rate. If you are going to remain small, choosing to become a sole trader is likely a good option.

Whatever choice you choose to make, always ensure that your business is in complete compliance with all of the regulations required by the government from either entity.

FAQs

How do I pay myself from a limited company?

If you are a company director of a limited company, you have the option of paying yourself a salary through the government’s PAYE system. But you will need to register through HMRC as an employer to take advantage of this option.

Otherwise, you can always pay yourself a dividend as the owner and manager of your limited company.

Should I change from sole trader to limited company?

If you are a sole trader and your business is starting to grow beyond the scope of what you can handle, or even what you and a hired accountant can handle, it is likely a good idea to consider registering your business as a limited company.

If you have an accountant, they can talk to you about all the benefits of becoming a limited company, many of which we have outlined in this article. Feel free to contact us and we will be happy to discuss your options and offer recommendations.

Does a sole trader pay less tax?

A sole trader actually ends up paying more tax overall when compared to a limited company. As your sole trader business starts to grow, the amount of tax you pay will continue to rise and at that point, you may want to consider looking into registering as a limited company.

A limited company will actually save on tax in the long run since the company is registered as such through the government and HMRC, which can also include some benefits seen with certain corporate tax rates.

Can a sole trader have employees?

Yes, a sole trader can choose to hire employees if they wish as long as they make sure to report these changes to HMRC. A sole trader can have as many employees working for them as they wish and there is no requirement to become a limited company if you begin to employ individuals.

Do I need an accountant as a sole trader?

Sole traders may not need an accountant if their workflow is small, but the more clients you take on or the more business models you implement, it will certainly do you well to consult with an accountant to handle all of the financial obligations of your company.

At Treetops, we make it our service pledge to always strive to make our sole traders stand to benefit the most from their business without the worry of finances.

Why Choose Treetops Chartered Accountants?

Whilst being a sole trader or limited company has many benefits, there are additional requirements you must meet when operating as either, and Treetops have you covered.

We offer:

Experience

Our approachable team of chartered accountants has years of experience dealing with Limited company compliance across a variety of industries. You can rest easy knowing we are looking, after all, for your legal and tax obligations. For sole traders, we can offer crucial advice through accounting services for easier business navigation and completely handle all your self-assessment tax needs with HMRC.

Value for money

We give you an upfront fee quote each year and this includes access to us throughout the year. Wanting to grow your business? Have questions you need answering? Then pick up the phone, drop us a line, or pop in for a chat with one of our team for no extra cost.

We make it all easy to understand

The rules can be complex and time-consuming for either choice, and we know as business owners you are busy being experts in your fields meaning you don’t have time to be accounting experts too. That’s why we make everything simple and easy to understand.

If you are looking to set up your own limited company, or need help with establishing yourself as a sole trader, we can support you through the process every step of the way.

Contact us today

Contact us today by phone at 01252 541 401, by email at help@ttca.co.uk, or feel free to fill out our convenient contact form and one of our friendly representatives will get back to you quickly. We look forward to addressing all your limited company or sole trader inquiries.

Tom McManners
Tom McManners BSc ACA ACMI

Tom is a Chartered Accountant and Senior Statutory Auditor. He is also the Director at Treetops. For more accounting advice please call or complete our website contact form:

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Treetops is an established Chartered Accounting firm based in Farnborough, Hampshire. We have clients locally and nationally. For advice and a free consultation please contact us.

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