Sole Trader or Limited Company – which is best for you?
We are often asked which business structure is best – a sole trader or a limited company. The truth is there is no one answer fits all, it depends upon individual circumstances and there are advantages and disadvantages associated with both structures.
The difference between a sole trade and limited company
The main difference is the legal structure
Sole Traders
Sole traders are self-employed individuals, who are personally liable for all the debts of the business.
Limited Companies (Ltd.)
A Limited company is a separate legal entity and allows the business owner ‘limited liability’ meaning your personal assets are protected if the company experiences financial difficulties.
The 2 structures are also taxed differently.
Sole traders pay income tax on net profit whereas a limited company will pay corporation tax on it’s profits. It is generally thought that a limited structure is more tax efficient than a sole trade. The rate of corporation tax is often lower than the income tax that a soler trader will pay and directors of a limited company can choose to take a smaller salary and receive additional income as dividends, which can also result in a lower tax bill.
However, there is more paperwork involved in operating as a limited company and it comes with increased legal obligations. Also, the company must be registered at Companies House opening it up to public view whether it is thriving or struggling.
Pros and cons of being a sole trader
Pros
- Limited liability for company debts
- More tax efficient way to structure income
- Many clients prefer to work with limited companies
- Can be easier to raise finance
Cons
- More legal administrative duties
- Increased accountancy fees
- Limited financial privacy
Pros and cons of limited company
Pros
- All the profits after tax are yours
- Administration is simple
- You have complete control over business decisions
Cons
- Unlimited personal liability
- Some clients will not work with sole traders
- Can limit funding options
- Less tax efficient once higher profits are reached
Which is best?
When it comes to deciding whether to be sole trader or limited company, there is no clear-cut option. Many of our clients have started as sole traders and then evolved into a limited company as the business has grown. The best decision for your business depends upon your circumstances and we recommend you seek professional advice.