Limited Company vs Sole Trader: Pros, Cons & What’s Best for You (2024)

Is a Limited Company Better for You Than a Sole Trader?

Selecting the appropriate legal structure is one of the first significant decisions you will have to make when starting your own business, which is an exciting step. Is it better to register a limited business or establish yourself as a sole proprietor?

This decision has an impact on your personal liability, tax liability, business reputation, and even the ease of obtaining capital. We'll go over the benefits, drawbacks, and main distinctions in this extensive guide to help you make the best choice.

Contents Table

• A Sole Trader: What Is It?

• A Limited Company: What Is It?

• Important Distinctions Between Limited Companies and Sole Traders

• Benefits and Drawbacks of Sole Trading

• Benefits and Drawbacks of Operating a Limited Company

• Tax-Related Issues

• Financial and Legal Obligations

• Branding and Perception

• What Is the Best Structure for You?

• Modifying the Organisation of Your Company

• FAQs

• Concluding remarks

1. First, what is a sole proprietor?

In the UK, the most basic type of business ownership is that of a lone trader. You manage your firm on your own and are self-employed. The owner and the business are one and the same legally.

Important attributes:

• Complete authority over business choices

• In charge of all earnings, losses, and debts

• Easy HMRC registration

• requires a self-assessment tax return each year.

2. A Limited Company: What Is It?

Even if a limited corporation only has one director or shareholder, it is nevertheless a distinct legal entity from its owner or owners. It must follow stringent reporting and regulatory standards and be registered with Companies House.

Important attributes:

• Directors' and shareholders' limited liability

• pays profits-related corporation tax.

• Above a certain income, it may be more tax-efficient.

• regarded as more credible or professional.

3. Key Differences Between Sole Traders and Limited Companies

Sole Trader

Ownership: One individual owns and runs the business.

Legal Status: No legal separation between the owner and the business.

Liability: Unlimited – personal assets can be used to pay business debts.

Taxation: Profits taxed as personal income.

Setup: Easy and inexpensive to start with minimal regulation.

Privacy: Financial records are private.

Control: Full control and decision-making power.

Continuity: Business ends if the owner retires or dies.

Funding: Harder to raise external capital.

Limited Company

Ownership: Owned by shareholders; managed by directors.

Legal Status: Separate legal entity from its owners.

Liability: Limited – personal assets are protected.

Taxation: Pays corporation tax; owners may pay tax on salary/dividends.

Setup: More complex and costly to register.

Privacy: Must file annual accounts and other details publicly.

Control: Shared among directors or governed by shareholders.

Continuity: Continues to exist regardless of changes in ownership.

Funding: Easier to raise finance or attract investors.

4. Benefits and Drawbacks of Operating as a Sole Trader

Advantages: Simple and fast setup

Reduced obligations for reporting

Complete authority over decisions and profits

Reduced expenses for administration

Cons: Infinite personal responsibility

Less tax-efficient when income is higher

may have trouble getting money or credibility.

Separating personal and company finances is more difficult.

5. Benefits and Drawbacks of Managing a Limited Company

Benefits:

• Limited protection against liability

• Additional chances for tax planning

• Increased trustworthiness with investors and clients

• Simpler to transfer ownership or sell

Cons:

• More complicated administration and setup

• Directors are subject to legal obligations.

• Information about the company is public.

• Withdrawing profits (salary plus dividends) might be complicated.

6. Sole Trader Tax Considerations:

You use the Self Assessment method to pay Class 2 and Class 4 National Insurance as well as income tax on your profits.

For instance, a profit of £40,000 is subject to basic rate (20%) tax.

reduced capacity to deduct business expenditures as a firm

Corporation tax, which is currently 25% as of April 2023 for profits over £50,000, is paid by limited companies. You can lower your overall tax liability as a director by paying yourself a combination of dividends and compensation.

It is possible to implement tax-efficient tactics such as withdrawing dividends below personal allowance thresholds or keeping profits in the company.

7. Financial and Legal Obligations

As a sole proprietor, you must maintain precise records of your earnings and outlays.

File your yearly self-assessment tax returns.

Pay your national insurance and income taxes.

As Limited Company, Submit Confirmation Statements and Annual Accounts to Companies House

Send HMRC your corporation tax returns.

Keep track of financial documents and company registries.

Directors have fiduciary responsibilities, such as acting in the best interests of the company.

8. Branding and Perception

How you are seen by clients and customers might be influenced by your business structure.

As sole proprietors, might seem more adaptable or intimate, they might not be seen as stable.

Particularly in business-to-business settings, limited corporations tend to appear more reputable and established.

In certain sectors, like consulting or banking, suppliers are even required to function as limited businesses.

9. What Is the Best Structure for You?

Consider the following:

A sole proprietorship might be appropriate if:

• You're testing a company idea

• You're looking for an easy, inexpensive setup.

• You make less than £50,000 a year.

• You work as a consultant or freelancer.

A limited company can be preferable If you desire restricted liability protection:

• You intend to reinvest your earnings.

• You desire tax efficiency for increased income.

• You're looking for investment or employing employees.

• Your goal is to create lasting value.

10. Modifying the Organisation of Your Company

Starting as a single proprietor and later converting to a limited corporation is feasible. Many business owners start off this way, keeping things straightforward, and later incorporate when their company starts to turn a profit.

The switch entails:

• Incorporating your business
  

• Notifying HMRC and closing your sole trader account
  

• Transferring assets, contracts, and finances
  

To prevent tax or legal problems during the move, always get advice from an accountant.

11. Frequently Asked Questions

• Can I operate a limited company and be a single proprietor at the same time?

  Yes, but you have to maintain different accounts and records for each.

• Limited liability: what is it?

  It implies that just the money you have put in the firm is at risk and that you are not held personally responsible for corporate obligations.

• Is an accountant necessary?

  Although it's not required by law, limited corporations are strongly encouraged to do so because of the more intricate reporting obligations.

• How can a limited corporation pay itself?

  Through a mix of dividends and salaries. Dividends are paid from earnings after taxes, whereas salaries are paid through PAYE.

12. Concluding remarks

Your income, risk tolerance, and long-term objectives will all play a role in your decision between a limited company and a sole proprietorship.

Being a sole trader is the best option if you're just starting out and want a low-risk, low-hassle path. However, a limited company can provide the ideal structure if you're making more money, want to grow, or seek legal protection.

Whatever you choose, be sure it fits your business goals and come back to it as your company expands.

Do you need assistance making a decision? Consult a business counsellor or accountant for advice specific to your situation.