Starting a new business - Limited Company vs Sole Trader
Updated: Aug 13
Have you just decided to open your own business? Don't know whether to register as a Limited Company or a Sole Trader?
With so much information out there it can be so confusing. To help, I have decided to write a quick blog describing the difference between registering as a Limited Company or a Sole Trader to help you work out which is the best option for you.
The advantages of becoming a Limited Company is the benefit of limited liability, as incorporation forms a legal distinction between the business owner and their business. This means that personal assets are not exposed - you only stand to lose what you put into the company not your personal assets.
Limited Companies stand to be more tax efficient than Sole Traders, as rather than paying Income Tax they pay Corporation Tax on their profits. As things stand this offers a kinder tax rate, meaning forming a Limited Company can be more profitable. In addition to this, there is a wider range of allowances and tax-deductible costs that a Limited Company can claim against its profits.
Plus, once you have registered a company name nobody else can use it, in contrast to Sole Traders who are not offered the same protection.
Here are some of the disadvantages of registering as a Limited Company:
Added responsibilities such as in the form of what is called the Director's Fiduciary Responsibilities, which basically outline what a Limited Company must do legally. You will need to file a yearly annual return for one, as well as annual accounts.
Thanks to these added responsibilities going limited can be a little more costly and time-consuming, as you will need to either deal with this extra paperwork yourself or as I recommend you hire an accountant to handle that side of things. You may also need a Bookkeeper if you do not have a clear understanding of the financial side.
In contrast to Sole Traders information on your business can be found via Companies House, details on directors and your company's earnings are required to be shown publicly. This sort of transparency may not appeal to some.
TO BECOME A LIMITED COMPANY
You must register with Companies House and use a name that is not already taken, so you will need to do a search on the companies house website to ensure your chosen name is not already being used.
This can be done here:
Once you have found your desired name, you can then register your business on the Companies House website:
When you have completed the registration process online, you have to sign up for Corporation Tax also.
To draw money from the business you would need to set yourself up as an employee to receive a regular wage and/or you can withdraw a dividend from the business. Discuss this with a Bookkeeper or an Accountant if you are unsure of this process.
The advantages of becoming a Sole Trader is due to how easy it is to set up and with relatively little paperwork, other than an annual self-assessment tax return.
Being a Sole Trader has greater privacy than Limited Companies due to not needing to have their details on the Companies House register.
Here are some disadvantages of becoming a sole trader:
Sole Traders have unlimited liability, as they are not viewed as a separate entity by UK law. This meant that if the business gets into debt, the business owner is personally liable. As such, sole traders could lose personal assets if things go wrong.
Raising finances can be tricky, as banks and other investors tend to prefer Limited Companies. This limits the expansion opportunities of Sole Traders.
Tax rates on Sole Traders are not always as kind as they are on Limited Companies. When you reach a certain level of earnings, it might not be quite as lucrative to stay a Sole Trader.
TO BECOME A SOLE TRADER
To set up as a Sole Trader, you need to tell HMRC that you pay tax through Self Assessment. You’ll need to file a tax return every year.
Once you decide which one to register your business as, then the fun will begin so good luck with your new business and if you need any support at all, please do get in touch firstname.lastname@example.org
If you need any help with your admin, have a read of '50 Tasks I can do in an hour' to see how I can help you and your business.
Heidi - Virtual Assistant
Keeping your Books Ltd