Sole Trader or Limited Company: Which is the best?

Sole trader vs. Limited Company: Choose Wisely

Should I start my business as Sole Trader or a limited company?” You might be looking for the answer, right? No worries. Like you, many people ask this question before company formation. Though your choice depends on many factors like income, taxes, market trends, customers, and management, to help you decide whether your business will be better suited as a limited company or as a sole trader entity, in this blog we’ll outline the definition and pros & cons of both, letting you decide which one is the best for you. Sole Trader vs Limited Company: Which Is The Best?

If you are yet to decide between the two, it’d be better to know what actually Sole trader is.

Sole Trader:

A sole trader, also known as a sole proprietorship, is a simple business structure in which one individual runs and owns the entire business. If you’re a sole trader, you have no legal identity separate from your business. A sole trader is entitled to keep all profits after taxes have been deducted but is also liable for all losses the business incurs.

Unlike limited companies, which are required to follow a process called incorporation, there is no specific process for registering as a sole trader. Instead, all you have to do is register as self-employed by registering for Self Assessment. If you want to register as a sole trader, you will only need to complete a registration form via HMRC. You’ll need to file a tax return every year.

Advantages of A Sole Trader:

In the UK, sole traders comprise 56% of the total business community. Let’s find out the reason for this huge inclination towards it:

  • You don’t need to register as a corporation to company house
  • You are exempted from registration charges
  • A sole trader has sole authority over the business
  • Receive all the profit
  • Cheaper to launch
  • Less accounting cost
  • No display of records

Disadvantages of A Sole Trader:

  • The sole trader is responsible for all unlimited personal or business liabilities
  • Only a single person makes all business decisions
  • Challenging to increase capital
  • You are required to pay Income tax and National Insurance
  • Less credibility
  • Not tax-efficient as a limited company
  • Grants no leave pay

Consider GNS as your consultant who can promise you to deal with every concern of your sole trader’s account and tax returns services.

To know the best implications of a sole trader or limited company, you should be well aware of them both. Let’s discuss what a limited company is.

A limited company is a business structure that is registered at Companies House. Unlike a sole trader, a limited company is a distinct legal entity that is comprehensively separate from the company’s owners and the company itself holds responsibility for its finances and debts. In this respect, the owners benefit from lower financial responsibility for company debts — this is known as “limited liability”.

Shareholders or guarantors own it. It’s more credible and authoritative than a sole proprietorship.

Directors own the responsibility of managing a limited company. Limited company directors have the responsibility of managing a limited company. A limited company is liable for corporation tax, and annual tax returns and it should follow the guidelines of the Companies Act. Though, there are more administrative responsibilities but is more tax-efficient than a sole trader.

Advantages of being a limited company

The following “advantages of a limited company” may convince you to choose this over a sole trader registration.

  • Limited companies are separate from the owners.
  • A limited company provides limited liability; this means the personal finances /assets of shareholders/guarantors are protected over and above their agreement of investment/guarantee to the company.
  • Limited liabilities exude a professional and credible status.
  • Limited companies are comparatively more appealing to clients/customers.
  • Less challenging to raise capital from lenders/investors with a limited company.
  • Scaling and growing a business is often easier when set up as a company.
  • Corporation tax is payable on all taxable income.
  • Limited companies are more tax-efficient.
  • Directors can pay themselves a combination of salary and dividends, which has far better tax implications.
  • Selling shares in exchange for capital investment.

Disadvantages of a Limited company?

  • company registers and records must be maintained and made available for public inspection at your registered office
  • Needs registration to company house and HMRC
  • Expensive to establish
  • Requires displaying information on public record
  • Needs more administration
  • Needs rigorous accounting/ audit
  • Difficult displace money

After knowing the pros and cons of sole trader and limited company in detail, you might have decided now which company suits your needs. If you are still confused about deciding whether sole or limited company you should consult the expertise of our GNS, they will help you to deal with your concern.

If you wish to go for a limited company, our GNS limited company accountants are always available for help! Contact us through our website or reach out to us on Facebook.

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