Sole Trader or Limited Company?

Sole Trader or Limited Company?

April 20, 2022 by Sandra

Sole trader or limited company?” is one of the most common questions we are asked by the self-employed.

The decision isn’t a straightforward one, and will have a wide array of implications for tax as well as legal and financial responsibilities. 

So, how do you answer the question “sole trader or limited company?”. The biggest difference between the two is that a sole trader is owned and controlled by one person, whereas a limited company is a type of business structure with its own legal identity that is separate from its owners (also known as shareholders).

Unfortunately, there is no single answer to the age-old debate of which is the best option for the self-employed – which is why we’ve written this guide to give you an overview of which might be best title for you...

Everything you need to know to determine if you’re a sole trader or limited company:

What is a sole trader?

A sole trader is essentially a self-employed person who is the sole owner of their business. It’s the simplest (and most popular!) business structure out there. 

To become a sole trader, you will need to contact HMRC and register for self-assessment, and at the end of the year, you must complete and return your self-assessment tax return forms to HMRC, who will then tell you the amount of tax you need to pay. 

The pros and cons of being a sole trader

There are several benefits to being a sole trader rather than a limited company, including potentially lower levels of taxation (as they are based around income tax), greater flexibility for the owner, and fewer forms to fill in (and less paperwork, too)!

There’s also greater privacy than with incorporated businesses, whose details can be easily found via Companies House. 

However, on the negative side, you are personally liable for all business debt and liabilities – which means should things take a turn for the worse, it could lead to the nightmare scenario of you losing all your assets. 

What’s more, raising finance can also be trickier for sole traders, as banks and investors often prefer limited companies. Finally, once you reach a certain level of earnings, the tax rates aren’t as kind.

What is a limited company?

Limited companies are a bit more complex. For starters, the owner will have to register with Companies House and receive a certificate of incorporation. This is legal proof that the company exists, and includes its unique company number and date of formation. 

However, there are many restrictions on company names, along with a wide range of other specific attributes you must adhere to. For further information, the website explains the process in much more detail, and is a great place to start.

The pros and cons of being a limited company

Some individuals will choose to operate as a limited company simply because many clients will only do business with limited companies, whilst other benefits include the company being legally separate from its owner.

This means you will have limited liability, and your personal assets won't be exposed; in other words, you only stand to lose what you put into the company.

However, the downsides of becoming a limited company include having to comply with more rules and regulations, higher accountancy fees, and the penalties for incorrect paperwork are a lot higher, too. 

What’s more, a limited company will also have to pay corporation tax, and cannot withdraw money from the company without recording it as a salary, dividend, or loan. You’ll also have more paperwork to deal with in the form of annual tax returns and accounts. 

So, which is right for me?

As we said above, “sole trader or limited company?” is a notoriously tricky question to answer, and will very much depend on your own personal situation. 

The decision is a difficult one, and each scenario will require individual assessment, which means there is no clear-cut answer for any business. 

How McAlister & Co can help

McAlister & Co are experts in matters surrounding both sole traders and limited companies, and our team of insolvency practitioners understand the difficulties people can face when running a business. 

In fact, our experienced sole trader insolvency team are on hand to answer any questions you might have and provide free confidential advice should you find yourself facing financial difficulty – so contact us today for sole trader insolvency advice. 

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Filed Under: Business Insolvency

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