Limited company vs Sole Trader
With the explosion of the self employment in the UK at moment, we get asked from many digital marketers looking to go it alone “what’s the best way to set up in business”. At Promotion Is My Business we’re not just here to look at the latest marketing tools, techniques and advice, we’re also here to help you make your passion for marketing into a business which can support you and your loved ones.
Starting up a new business can be quite intimidating, and the first thing you’ll have to do is decide what kind of business you should form. The two most common types are trading as a limited company or as a sole trader. Both have advantages and disadvantages, and it’s up to you to see what type best suits you. There are many other things to consider, such as, financing, taxation, continuity, etc.
There are many advantages to running your business as a sole trader. One main advantage is the simplicity. It’s very easy to start up a business as a sole trader, and you’ll have lower accounting costs compared to setting up a company. You can trade under your name, or have a separate business name. If you operate your business as a sole trader, you avoid all the costs involved in creating a limited company.
However, running as a sole trader has its risks. Your liability is unlimited. You will be liable for all the company’s debts and contracts, and there is no difference between business and personal assets. So everything you own can be at risk. It’s also harder to split your income with other people who may be involved in your business.
A limited company offers the most protection to owners. Shareholders own the business, and the company debt is limited to the amount that they invested in the company. A board of directors operates the limited company, and they act on behalf of all the shareholders. However, in most small businesses they form the company and serve as both the shareholder and director so that they have the benefit of limited liability.
Factors to consider
There are many other factors to consider before creating a company, here are the important ones:
Many people decide to trade as a limited company instead of a sole trader due to the tax benefits. Business owners can make tax savings through the use of dividends and payroll planning. However, you would also need to consider the additional administration costs as company owners will have to fill out both company and personal tax returns. Sole traders only have to complete personal tax returns. However, the company tax rate is still lower than the top individual rate. If you’re not sure which structure best suits you, it’s best to seek advice from an accountant. They would be able to show you how to minimise tax liability.
When starting your business, you’ll need to source enough capital to both start and maintain the business until it’s profitable. A company may find it easier to attract investments and funding, especially as shareholders are only liable for the amount they invest in the company. Sole trader structures don’t allow shares, so if you want to raise capital, you’ll need to get a loan through the bank. It can be difficult as banks would need to see sufficient cash flow in the business.
A company can operate forever because it is considered as a separate legal entity, whereas a sole trader is normally limited to the lifespan of the individual.
A board of directors runs a company, so decision making can be difficult since people may have different ideas of what is best for the company. The business structure also has higher levels of regulation compared to a sole trader. A sole trader has total control of his or her own business, and it can make all the decisions.
Sole traders cannot keep their profits. All profits are considered as income, so it is taxed at the personal marginal rate. Companies, on the other hand, can distribute their profits to shareholders, or keep them to grow the business.
6. Registration and fees
Sole trader business structure is very easy to set up; there is no registration or maintenance fee required. As for a company business structure, there is a yearly registration fee to list on the company’s registrar.
It’s far easier to set up as a sole trader than as a company. However, setting up as a company can give you better protection, and flexibility with profits. The type of business structure that best suits you will depend on your current situation, the type of business you’re running and what you’re long term plans are for business growth. We found a great sole trader vs limited company calculator to help you make a more informed choice.
As always though, make sure you find yourself a good business advisor to help you make the right choice for your circumstances. If you don’t know one personally and can’t get any recommendations then check out a good local business directory that has reviews and start your search there.