Sole Trader Or Limited Company? (UK November 2020)
Ah, the big debate when starting a new company in the UK. To be, or not to be, a limited company.
Let's start with the basics. For the majority of profit making businesses, owners will choose either a sole trader or a private limited company by shares.
What is a sole trader?
A sole trader is a "a person who is the exclusive owner of a business, entitled to keep all profits after tax has been paid but liable for all losses" according to the Oxford Dictionary.
What is a limited company?
A limited company is a separate legal entity from its owners (even if it only has one owner), and benefits from limited liability.
Find out all you need to know about setting up and running a limited company here.
Okay, so we know the basics. How do we choose? First, the main advantages.
The biggest advantage of a sole trader: little to no paperwork.
The biggest advantage of a limited company: limited liability.*
* Limited liability means that you are only liable for the amount of money that is within the company.
For example, if you have unlimited liability and put £50,000 into your sole trader, and then owe £100,000, you will have to find the other £50,000 from your personal assets. You will be personally fully liable for the debt.
If you have limited liability, and you put £50,000 into your limited company, you will only ever be liable for up to £50,000.
Other advantages of a sole trader
+ You can take advantage of your personal allowance of £12,500.
+ You file all of your income in the same self assessment
+ No shareholders to answer to
+ May have lower tax rates
Dis-advantages of a sole trader
x Unlimited liability
x Higher tax rates after a certain level of income (this depends on your expenditure, revenue streams, etc)
x More difficult to raise capital
Other advantages of a limited company
+ Tax efficiencies
+ Potentially improved reputation
+ Easier to raise capital
+ Easier to collaborate
Dis-advantages of a limited company
x More paperwork (confirmation statements, company tax filing, annual accounts, etc)
x Personal details will be disclosed on companies house
x More difficult to change information
So, it really depends on what you are looking for. If you are looking to raise some capital and recruit in some business partners, a limited liability is the way forward. If you are running a few odd jobs and want to quickest and easiest way to declare your income, you will likely choose a sole trader.
Still undecided? Book an appointment with us and we can give you a more personalized recommendation, free of charge.