Every business, notwithstanding its size, requires a legal structure. A business can choose to be either a limited company, a partnership, or a sole trader. However, most businesses prefer to be a private limited company or a sole trader. A sole trader is basically a self-employed person and is the sole owner of the business. It is a simple structure of a business and is quite popular in the UK. You can easily set one up using the website gov.uk. You must do so essentially to pay company tax or serve other tax purposes.
On the other hand, a UK limited company is a structure of a business having its own legal identity and is separate from its directors and shareholders, requiring limited company registration with Companies House. It can be a case even if it is being run by a single person, whether he is the director or the shareholder of the company. Want to know the advantages and drawbacks of both the sole trader and the private limited company? Here we are running through their pros and cons!
Pros & Cons of Sole Trader
Advantages:
- A sole trader is an easy set up and requires little documentation apart from an annual self-assessment tax
- It offers greater privacy compared to limited companies.
Drawbacks:
- The disadvantage of being a sole trader is that you have an unlimited liability. In case your business gets into debt, you are personally liable for it.
- In case things go wrong, sole traders can lose their personal assets.
- Raising funding can be quite tricky for sole traders as well hence limiting their expansion opportunities.
- Rates of income tax on sole traders are also not very kind too.
Pros & Cons of Limited Company
Advantages:
- If you register a limited company, it would be legally separate from its business owner who would have limited liability.
- Personal assets are not exposed in case of a limited company. You can only lose what you have put into the company
- While registering a company, the name of your company can’t be used by anyone else. Sole traders don’t have that luxury or protection.
Drawbacks:
- A UK limited company has more responsibilities and duties. These include fiduciary responsibilities of a director that outline what a director should do legally.
- Due to these added responsibilities, running a limited company can be time-consuming and costly. You will need to hire an accountant to handle corporation tax and deal with additional documentation and paperwork.
- Information regarding your business can be found using Companies House. Your company’s earnings and details regarding directors would need to be publicly shown. Such transparency is never appealing.
Sole Trader or Limited Company – Which One to Prefer?
To conclude, you need to compare the differences between a limited company and a sole trader. No matter which business structure you choose, it will impact your business, from paperwork to profits. However, register a limited company because it is more preferable, thanks to some key advantages limited companies offer. So, weigh the advantages and drawbacks to make your decision. Call our qualified tax advisers to discuss your requirements.
