Sole Trader Versus Limited Company

If you’re about to head out on the road to becoming a sole trader or are thinking about making the change to a limited company, you may find yourself wondering about the pros and cons to both. We’ve created this guide on self-employed vs limited companies to tell you about the potential benefits and disadvantages to both, to help you make an informed decision that’s right for your business.

What’s a limited company?

A limited company is a type of business structure that gives your company its own legal entity separate from you – even if it’s just run by one person. You become the director and act on the behalf of your business.

How do I get paid as a limited company?

Those who choose to register as a limited company can either pay themselves a salary or dividends from the available profits. Due to this, your company needs to be registered with HMRC as an employer and on top of this, you’ll need to register for self-assessment yourself.

If you choose to pay yourself a salary, if you meet the threshold you may need to pay national insurance too. Many will give themselves a salary up to the personal allowance limit, then pay themselves through dividends (money left over from paying for business costs and expenses) for the rest as the first £2,000 is tax free.

Benefits of a limited company

As businesses get more lucrative, many choose to switch to a limited company due to reduced tax rates and an increased chance to get credit. The main benefits of limited companies are as follows:

Limited liability

With a limited company, you get limited liability. Where sole traders are completely responsible for their business, with a limited company the business assets and liabilities become completely separate to you. This means that if you run into trouble, your personal finances will be protected.

More profitability

Becoming a limited company could make your business more profitable. For a start, you’ll pay corporation tax instead of income tax which as it stands, is a lower tax rate. Additionally, there’s more allowances and tax-deductible costs that can be claimed, including stationery supplies, mileage costs and business trips to name a few.

Ownership of company name

When you register as a limited company, your company name belongs to you and can’t be used by anyone else. This is different from sole traders who don’t get this protection.

More likely to get finance

Your business can establish its own credit rating, which means that banks and lenders are more likely to give loans or finance. This is especially good if you have a lower credit score and are looking for funds to grow and expand your business.

Disadvantages of a limited company

With any benefits, there are also negatives to consider. Namely, you’ll face more paperwork and responsibilities with a limited company. The main disadvantages of a limited company are:

More paperwork and responsibilities

If you decide to register as a limited company, there’s additional paperwork and responsibilities that go with it. You’ll need to file a yearly return, annual accounts and if your business is VAT registered, you’ll need to do a VAT return too.

Less privacy

When it comes to the battle of sole trader versus limited company, many choose not to go down the limited company route due to less privacy. It’s a requirement for business details to be posted on Companies House, so everyone will be able to view details of the directors and the businesses earnings.

What’s a sole trader?

Currently, being a sole trader is the most popular option in the UK. One of the key benefits of sole traders is that it’s very straightforward and simple, you register as self-employed and are the sole owner of the business.

How do I get paid as a sole trader?

When it comes to your payment, any profits after filing your sole trader tax return are yours to keep.

Benefits of a sole trader

Being a sole trader is one of the most popular options, which is largely due to the lack of paperwork. A few of the benefits of a sole trader are:

Less paperwork

One of the biggest benefits of a sole trader is less paperwork. You’ll only need to do your self-assessment tax return each year and that’s it.

More privacy

Unlike a limited company, sole traders don’t need to share their business details with Companies House – so you can maintain maximum privacy with your business.

Disadvantages of a sole trader

Where the lack of paperwork is a big tick for those with busy schedules, there are also numerous disadvantages of sole traders to consider.

You are your business

As there’s no differentiation between you and your business – your personal and business finances are considered the same. Where this is good because any money after tax and expenses is yours, if you fall into debt, your personal finances and assets could be in trouble. You’ll also need to ensure that you have insurance in place as if you find yourself in a lawsuit, you may be sued personally.

Finance may be tricky

If your credit score isn’t the best, getting finance or a loan may be difficult. Banks are more likely to lend to limited companies and as mentioned before, your business can establish its own credit rating too.

Tax rates may be higher

As mentioned previously, tax rates for limited companies are generally kinder, and as such, you could end up paying more tax as a sole trader.

How SixtyFour8 can help

If you’re in a muddle about sole traders versus limited companies, we can help. Our team of dedicated, personal accountants can help advise you on what’s best for you and your business.

Whether you’ve just made the decision to become a limited company and need extra help with the additional paperwork or if you’re happy being a sole trader and need someone to assist with your tax return contact us today or calls us on: 01633 288299.