Which fits your business best, sole trader or limited company? There’s no one-size-fits-all when it comes to deciding between being a sole trader or a limited company, and there are pros and cons to each option. To explore being a sole trader vs a limited company, the differences to be aware of, and which option is best for you, continue reading.
What is a Sole Trader?
A sole trader in the UK is a self-employed individual with no legal distinction between themselves and their business. Sole traders are 100% responsible for running their business, controlling workload, creating schedules, meeting deadlines, negotiating with clients, and handling financial affairs with HMRC via a self-assessment tax return.
What is a Limited Company?
A limited company in the UK is a private organisation that’s distinct from its owners (shareholders) and must have at least one director to manage its affairs. If you’re a shareholder of a limited company, you’ll have your own legal identity from the company, and your personal finances will be kept separate.
This means you’ll have limited liability, and you won’t be personally liable for the company’s debts if they’re beyond the amount you’ve invested.
Sole Trader vs Limited Company
What’s the difference between a sole trader and a limited company?
| Sole Trader | Limited Company |
|---|---|
| Owned by one person | Owned by one or multiple shareholders |
| Managed by owner | Managed by directors |
| No separate legal identity | Separate legal identity |
| Personal liability | Limited liability |
| Profits kept by owner | Profits retained within financial company accounts or distributed to shareholders as dividends |
It’s important to understand the key differences between operating as a sole trader or limited company, especially while deciding which business structure is best.
Sole Trader: Pros and Cons
Pros
- Easy set-up
- Simple registration
- Less paperwork
- Fewer tax responsibilities
- No corporate tax
- Full control
- Private business details
Cons
- Unlimited personal liability
- Limited funding
- Multiple roles to manage
- Important business decisions fall on you
- Long hours
- Easier to close down
Limited Company: Pros and Cons
Pros
- Proficient status
- Ownership of the company name
- Limited liability
- Attractive to work with
- Funding and growth opportunities
- Tax planning
Cons
- Complex setup
- More paperwork
- Increased costs
- Public business details
- Potential for shareholder disputes
- Difficult to close down
How to Change From Sole Trader to Limited Company
Is your business growing at an increasing scale? If so, consider forming your business as a limited company:
- Learn the differences between a sole trader and a limited company
- Register your new limited company with Companies House
- Notify HMRC of the change to your business
- Transfer your business assets
- Open a new bank account in your limited company’s name.
- Inform relevant people of the business change (clients, suppliers, etc.)
- Register for Corporation Tax
- Register as an employer
- Maintain important and relevant records in line with limited company requirements
- Seek professional support and assistance
Working with an accountant is highly advisable as you change from a sole trader to a limited company. Accountants better understand more complex tax and legal aspects and can guide you to make the right decisions while managing your accounts.
So, Which is Best? Sole Trader or Limited Company
There is no definite answer as to whether operating as a sole trader or a limited company is best, as the decision depends on your circumstances, business goals, and risk level. If you prefer total control over your business, taking personal financial risks and have a small, easy-to-manage business, operating as a sole trader is best.
However, if you have a larger-scale business with plans to expand in the future and want to increase funding or professional status, operating as a limited company is best.
Key Takeaways
- A sole trader in the UK is a self-employed individual with no legal distinction between themselves and their business
- A limited company in the UK is a private organisation that’s distinct from its owners (shareholders)
- Circumstances, business goals, and risk level decipher whether being a sole trader or a limited company is best
Support for Sole Traders and Limited Companies
At LJS Accounting Services, we offer trusted services to both sole traders and limited companies in the UK. Sole traders benefit greatly from having an accountant, and our team can help prepare and submit self-assessment tax returns while remaining compliant and provide financial advice to ensure long-term success.
For private companies, we can help manage company accounts while budgeting and predicting future financial performance. If you’re yet to set up a limited company, we can help manage the formation process – from purchasing your company to setting it up correctly.
To find out more about our expert services for sole traders and limited companies, please contact us today.
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.
