Sole Trader Vs Limited Company: Which One is Right for You?

Two women working together Deciding which business structure to use for your new venture is not an easy one.

It’s important to understand all of the potential options, as well as their advantages and disadvantages to make an informed choice.

In this blog post, we’ll look at two key structures: sole trader vs limited company; outlining the pros and cons of each so that you can decide which is best suited to meet your small business needs.

First of all, let’s get started with a quick definition of both business structures!

What is a Sole Trader?

A sole trader refers to an individual who runs their own business and is self-employed, without the formation of a company or partnership.

The sole trader is entitled to all profits.

However, they are also responsible for any losses, debts or liabilities that may arise from their business venture.

Unlike the creation of a limited company, it involves fewer administrative fees. Being a sole trader offers advantages such as complete control over your business decisions and recordkeeping being made simpler.

Can a Sole Trader Have Employees?

A lot of people wonder if they can have employees as sole traders. It simply boils down to this— “can I employ staff as a sole trader?”

The answer is yes. 

A sole trader can employ others even though they are a single proprietor. You don’t need to be a limited company to become an employer. 

Whilst the term “sole trader” is used for someone working on their own, this is not the legal definition. Legally, the term sole trader is used for anyone running a business who hasn’t set up a separate legal structure through which they operate, such as a partnership or a limited company. 

A limited company director can be legally a business employee. But you as a sole trader cannot employ yourself. The sole trader is the business, so there is no way to pay yourself as a separate individual. 

But you can still become an employer to have staff. 

However, you are required to follow some things when you are looking to employ someone as a sole trader. 

First of all, register as an employer with HM Revenue and Customs (HMRC). 

You then need to register for PAYE before the first payment of salary to your employees (but no more than two months in advance.)

And then there are some UK employment laws you have to comply with, such as…

  • Paying at least the minimum wage
  • Protecting employees from discrimination
  • Mandating maternity, paternity, and adoption leave compensation; requiring minimum rest periods and paid holiday
  • Rest breaks and paid holidays

The bottom line is that a sole trader can employ staff. However, it requires you to comply with certain legal guidelines, such as registering with HMRC and offering a minimum level of benefits to your employees – which you may well want to enhance as a conscientious employer. 

What is a Limited Company?

Limited companies are a form of corporate business structure which limits the legal liability of the directors, shareholders and other officers for the debts or actions of the company.

This is beneficial for larger businesses because it gives an in-depth separation between the personal property and liabilities of those associated with a company and its assets.

A limited company acts as a distinct entity from its founders, meaning that if it faces financial difficulty, creditors cannot make claims against any private possessions or income of its directors or members.

This structure also allows multiple owners to come together by shareholding agreement while providing certain tax advantages when compared to sole traders or partnerships.

Many start-up businesses can take advantage of these benefits and create successful networks over time.

What are the Advantages of Being a Sole Trader?

Being in Total Control of Your Business

You get to make all your own decisions with no interference from others. Unlike limited companies and partnerships, where there may be disagreements between several persons regarding business decisions, as a sole trader, you have the ultimate authority on all matters related to your business.

Anyone Can be a Sole Trader

Starting up a sole trading company is relatively simple as there are no restrictions on who can become a sole trader.

There are no qualifications or experience required to be a sole trader; anyone who is looking to start their own business, regardless of age or background, can do so without complicated procedures and lengthy documents.

No Big Investment is Required

Having a small capital to start your own business can be daunting, as it often seems like a large obstacle in working towards your dream. However, it is possible to become a successful sole trader with very little capitalisation.

Registering your venture as a sole trader is free compared to registering a limited company which can cost you £12-£40.

Setting up a sole trader business does not require you to access extensive resources or obtain extensive financing. You just need to figure out what skills and resources you have and decide how to leverage them into an income-generating venture. With the right support and planning, even modest financial investments can go a long way in starting your own business!

Total Flexibility

Whether it’s deciding on working hours, meeting with clients, or providing services, having the freedom to make decisions that best suit your particular situation is a fantastic thing – and key to the success of any business.

Availability of Support

As a sole trader, it is important to make sure you have the right support to build your business and stay compliant with regulations.

Thankfully there is now a range of online resources that can help you do this, from tailored one-to-one advice from experts to virtual courses covering legal and financial topics; there is something for all business owners.

There may also be government programmes which provide incentives or grants for new businesses. Local networking groups are another excellent way to stay informed and collaborate with other business owners in your area. There is also plenty of help available at events such as seminars and conferences related to your specific industry or region.

More Privacy

As a sole trader, you can manage your finances more securely as they remain private as it is not necessary to get registered with Companies House. Unlike limited companies, financial information submitted to Companies House is accessible by anyone and may be subject to identity theft if not handled securely.

Keep all of your post-tax profits

As you are the sole owner of your business, you can keep all of your post-tax profits.

What are the Disadvantages of Being a Sole Trader?

Unlimited Liability

This might be the biggest disadvantage associated with being a sole trader. Since sole traders are not considered separate entities by the law, you are subject to unlimited liability.

It means that if you ever fail to pay off debt, you might need to sell your car, house and other personal assets to pay those debts.

Fewer Funding Options

Getting your solo venture funded can be challenging as lenders and investors are likely to prefer limited companies. The lack of funds can hinder your expansion, not to mention slower growth than a limited company.

The majority of alternative long-term financing options won’t be accessible to single proprietors.

Limited Tax Efficiency

Compared to limited company owners who pay 19% corporate tax, sole proprietors pay 20–45% of their income in taxes. Regardless of how much money they actually take out of their business bank account, sole proprietors are taxed on the earnings or losses of their business personally.

Less Credibility

Some organisations may not choose to deal with you due to the limited legal protection compared to your bigger counterparts.

Your Business Name is Not Protected

Your business name is not protected, unlike limited companies. For example, anyone can use your trade name, leading to confusion among customers which in turn might cause a loss of sales.

What are The Benefits of Being a Limited Company?

Limited Liability

A sole trader may need to sell their personal assets such as a house and car to pay off their business debt. But this is not the case with a limited company, thanks to their reduced liability. To put it simply, if your company gets into trouble, your personal assets will still be protected.

This is because a limited company is viewed as a separate legal entity; a legal “person” in its own right. Therefore, the personal assets of the owner are protected from business debt.

(Note: Limited liability can only protect you as long as there are no personal guarantees involved or any unlawful or fraudulent practices.)

Attract Investment Easily

Limited companies are an attractive option for many investors due to the multitude of special advantages they offer.

For example, compared to unincorporated businesses such as sole traders, limited companies enjoy a degree of legal protection from personal liabilities as well as potential tax savings. Moreover, these firms often benefit from more stable cash flows which can make them ideal candidates for potential investors.

More Tax Efficiency

You as a limited company owner pay only 19% Corporation tax on profits, whereas a sole trader is subject to pay 20-45% income tax on profits.

If you are a shareholder or a director in a limited company, you can take a small salary and withdraw most of your income as dividends. This way, you can lower the National Insurance Contributions amount as limited company dividends are exempt from NIC.

Increased Credibility

A limited company is perceived as more reliable and legitimate, inspiring trust and confidence among suppliers and customers.

In fact, many businesses choose to only work with limited companies, citing the assurance offered by their legally binding status.

For example, your clients will require limited liability protection if you’re likely to handle sensitive information, complicated IT projects, or large-scale building contracts due to the huge risk involved in such projects. In this scenario, they may not prefer a sole trader.

Overall, forming a limited company provides an extra layer of corporate legitimacy that can be greatly advantageous for businesses looking to engage successfully with third parties.

Copyright Over Company Name

As a limited company, your our firm’s official name cannot be registered or utilised by another entity.

Minimal Setting Up Cost

It will cost you as little as £12 to register your limited company along with extra costs if you opt for the services of an accountant or tax consultant.

What are the Disadvantages of Being a Limited Company?

More Complex Accounting Requirements

One of the primary disadvantages of forming a limited company is that it requires more complex accounting than other forms of business organisations.

As an owner or director of a limited company, you will be responsible for filing annual financial statements and reports as well as preparing monthly accounts for HM Revenue & Customs (HMRC).

This can be quite time-consuming and may require additional expertise if you don’t already have experience dealing with this type of paperwork.

More Expensive Administrative Costs

In addition to more complicated accounting requirements, limited companies face higher administrative costs than sole traders or partnerships because they must register with Companies House and comply with all relevant regulations.

This includes fees for submitting annual returns and accounts as well as any other related paperwork such as changes in registered office address or directors details.

All these fees can add up quickly and make running a limited company considerably more expensive than other forms of organisation.

Being Exposed to Public Records (Little Privacy)

A limited company in the UK is required to go through Companies House.

This simply means that your business data, including corporate annual reports, records, and information about any directors and shareholders, will be accessible to the public.

There is less privacy with a limited firm.

Less Flexibility as Split Ownership Comes into Play

A limited company is likely to be run by multiple shareholders. And each shareholder can put forward his or her view in all business decisions.

The more shareholders there are, the less ownership you have in the organisation. When you run a limited company, you might not always agree with some decisions and you might engage in contracts you don’t want to. On top of that, there might be some company laws in place for meetings, shares, and payment of dividends

A Quick Recap

  Limited Company Sole Trader

Able to hire employees and pay the founder a salary through PAYE

Able to hire employees but can not employ the founder through PAYE; you must complete a self-assessment form to pay your tax

Less flexibility as there may be more than one owner involved.

Total flexibility

Company records are required to be made available to the public.

Company records can be kept private.
Expenses More expenses are involved.

Can be started and run with little investment.

Credibility They are more established and structured. Less credible due to the single ownership.

Better growth rate as they attract funding easily.

Limited growth.
Tax Efficiency Subject to 19% Tax The tax rate is Generally 19-45%.
Ease of Setting Up Complicated due to excessive paperwork and costs Limited paperwork and obligations

Sole Trader or Limited Company—Which is Right for You?

After going through the differences between a sole trader and a limited company structure, it might be overwhelming to decide on the right one.

Each one has its fair share of pros and cons.

Which one is right for you will be determined by your needs and personal preference.

Make sure to consider your business plans and long-term goals. If you are still not sure, you can get in touch with me or any other business consultant to find the right thing for you.

The Virtual COO was founded to help small businesses access expertise to deal with operational problems and more, without having to hire or pay for a full-time Chief Operations Officer.

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