No matter how big, or small, a business must have a legal structure in order to trade. The majority of start-ups opt to either become a sole trader, or a limited company – currently, there are around 3.4 million sole traders and 1.9 million limited companies within the UK – but what are the differences, and which could be the best choice for you? Here we look into the differences between the two to help you decide on the best fit for your business.
First, we look into the definitions:
A sole trader
A sole trader is a self-employed person who is the owner of their company. It is the most simple business structure, and the most popular. It requires little-to-no effort to set up and can be done with no monetary outlay.
A limited company
This business structure has its own identity and is separate from its owner, shareholders, and/or directors.
We asked Adam C from Ignite SEO, who works closely with both sole traders and limited companies and knows the challenges that they can face. He said “When you’re a sole trader, you and your small business are legally one and the same. But if you turn your business into a limited company (this is also known as ‘incorporation’), the company becomes a separate legal entity from you. This legal separation can work as both an advantage and disadvantage of incorporation, as you’ll see. Therefore, it is important for entrepreneurs to take this into consideration before deciding to either become sole traders or to have a limited company.”
Starting up as a sole trader vs limited company
To set up as a sole trader requires little effort or investment – industry and skill depending. You will need to have a National Insurance number and register online for a self-assessment tax return through HMRC. You are then able to begin trading as soon as you like.
It is a little more complicated to set up limited vs sole trader, with several steps involved. Initially, you need to be over the age of 16, with no history of bankruptcy, and have no legal prohibitions from serving as a business director. You then need to choose a unique business name that meets the requirements by law and choosing company officers. In addition to this, every limited company must have a minimum of one company officer who has responsibility for the company at all times. If you’re a private limited company then at least one company director is needed, for a public limited company there are two official representatives needed – a company director, and a company secretary.
Once this is all in place you can then register your limited company with Companies House.
Advantages and disadvantages to Sole Trader vs Limited Company
As with all business structures, there are pros and cons to each, here we look into the advantages and disadvantages to being a sole trader vs owning a limited company.
Sole trader advantages
- You are your own boss
- Your profits are your own
- Little-to-no startup costs
- Maximum business privacy
- Simple to establish and operate your business
- Easy to grow, develop and change your legal structure if circumstances change
Disadvantages of sole trading include:
- No legal distinction between business and private assets – unlimited liability for debts
- Limited capacity to raise capital
- 100% of the business decisions are on you
- No holiday or sick pay
Limited company advantages
- Minimal personal liability
- Tax efficiency
- Professional status
- Separate legal identity
- Investment and lending opportunities
Disadvantages of running a limited company include:
- Incorporation fee to Companies House and having to notify them of any changes to the company
- The company name will be subject to restrictions
- Accounting requirements more complex and time-consuming
- Strict procedures in place to withdraw money from the company
- Record keeping, down to meetings minutes, must be kept