If you are wanting to know the difference between a sole trader or a limited company and which one your business would be best as – then we are here to help guide you and give you all the information you might need so you can make an informed decision and one that fits right for you and your business.
There is not a one size fits all when it comes to deciding between a sole trader or a limited company and there are pros and cons to both, deciding on the best business structure should be based on your own business and your personal circumstances, so keep reading for more.
What is a Sole Trader?
If you are a sole trader then you can run your own business and are considered ‘self-employed’. If you choose to run your own business as a sole trader then you are personally responsible for your business. Your business is owned and controlled by just one person – you.
Any losses, debts or profits your business makes, you are personally liable for – the law will see you and your business as one – so consider this if you are willing to put yourself on the line and take full responsibility.
As your sole trader business will be solely yours you can keep any after-tax profits and choose what to spend the money on all yourself.
Sole trader businesses are usually the ones that provide specialist and specific services such as hairdressers, plumbers or electricians who choose to run their businesses as sole traders.
If you are self-employed, learn what you can claim back here.
What is a Limited Company?
To set up your business as a limited company means you will be setting up a private organisation to run your business. Your business will have its own legal identity separate from yours as an individual and will be kept separate from your personal finances too.
As director of your limited company, you will have limited liability for any losses or debts incurred by the business.
What Is the Difference Between a Sole Trader and a Limited Company?
So the biggest difference between a sole trader and a limited company is that a sole trader is owned and controlled by one person who has unlimited personal liability for the business and the ownership of a limited company will have its own split into equal shares. The shareholders of a limited company have limited liability for a business, this may mean that there is less personal money risk involved when choosing to set up your business as a limited company.
Advantages and Disadvantages of Running Your Business As a Sole Trader
The disadvantages of a sole trader business can be that you are fully liable for any loss your business makes so you may have to use your own personal money or savings to get out of any trouble or debts, which can be devastating.
Another disadvantage is that there will be no one to share accountability with if things go wrong – whilst you can hire staff, all the important business decisions fall on you.
The advantages of having a sole trader business are that it is easy to set up and is a simple registration, you have complete control over the business, and there will be less paperwork and fewer tax responsibilities.
Advantages and Disadvantages of Running Your Business As a Limited Company
As a director of a limited company, you can pay yourself in a combination of salary and dividends. With dividends having a lower tax threshold than salaried pay, you will be much more tax-efficient than when you are just paying yourself a salary, you can take home higher pay. To learn more about dividends, check out this post.
All shareholders have a limited liability should your business incur loss or debt, it is not your personal responsibility, unlike a sole trader business. Your personal assets will be protected.
The disadvantages of running a limited company are that it may be more time-consuming and have more administrative and tax requirements running a limited company as opposed to operating as a sole trader.
Accounts need to be filed every year which will be on public record and can be costly if you have a short-term contract as you will still be required to submit end-of-year accounts. We recommend contacting an accountant for help and advice.
Keli Evans, Director at LJS Accounting Services, excels in taxation and statutory accounts. With a focus on strong client relationships, she leads a diverse portfolio, overseeing vital financial aspects like VAT, payroll, pensions, and taxation with a holistic and committed approach.
