When starting a business, one of the foremost things is to decide the company’s legal structure. It may be a sole trader, limited company or a partnership. The most popular structure in the UK is a sole trader. Based on the facts, sole trader is accounted for 60% of the UK businesses followed by limited company. Both legal structure has some benefits and limitations.
What is a Sole Trader?
A sole trader is a legal business structure where the person is self-employed and responsible for running the business solely. It’s the easiest business structure and hence the most popular one.
What is a Limited Company?
Limited company is a legal structure who has its own separate legal entity different from its owners and its directors.
Limited Company | Sole Trader | |
| 1. | With limited company, you have limited liability | Here, the liability is unlimited. You are completely responsible for your business and finances |
| 2. | It is a separate business entity in the eyes of law | It is treated as one entity |
| 3. | This is the most tax efficient way of operating the business as you are only liable to pay corporation tax which is 19% (planning to be 17% by April 2020*) and dividend tax. Tax is deducted from directors’ salaries via PAYE and paid at regular intervals to HMRC | A sole trader has to pay tax on the profit earned and are above their personal tax allowance ((£12, 500 for the year 2019-20) The deadline for online tax returns is 31st January after the end of the tax year. |
| 4. | The disadvantage here is that you have to prepare annual accounts and then file with Companies House. And also need to file corporation tax with HMRC. | Here, being a sole trader, you don’t have any obligation whatsoever with filing of the accounts. |
| 5. | This can be costly and time consuming as you’ll need to deal with extra paperwork. | Little paperwork is required and easy to set up. Have to keep a record of expenses and income to file tax returns. |
| 6. | Information on your business can be found on Companies House. | Greater privacy compared to limited company as their data can be found in Companies House. |
| 7. | Easy access to finance as it is a separate business entity, has more credibility hence banks and businesses trust more. | Raising finance could be difficult as banks and lenders prefer limited companies so expansion opportunities are less. |
| 8. | Both employer’s and employee’s National Insurance (NI) is payable on directors’ salaries and bonuses. | Pay Class 2 NI contributions of £3.00 per week and Class 4 contributions on profits in excess of £8,632 (rates accurate for 2019/20). |
Conclusion
Sole trader is an easy way to set up compared to the limited company. But running a company through limited company has more advantages than the sole trader. Before, deciding onto anything you must consider all possible factors. Limited company seems more professional to the businesses, clients or contractors etc.
If you are unsure of what to choose, consult an accountant and don’t rush into any decision.
