Limited Company Vs Sole Trader

If you are thinking of launching a new business or are already in business but considering your legal structure options, you might be asking should I go limited or sole trader? Selecting a legal structure is a critical decision for business owners, but it can be challenging to comprehend the available choices. To help with this, RJF Accounting has the following guide to Limited Company Vs Sole Trader.

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Sole Trader vs Limited Company: What’s the Difference?

It is important to understand the distinction between operating as a sole trader or a limited company. A sole trader works as a self-employed business owner and is viewed as a single legal entity with their business. In contrast, a limited company is considered a separate legal entity from its shareholders and directors. Consequently, a sole trader is responsible for personal and business debts, putting personal assets at risk. On the other hand, the finances of a limited company are separate from the personal finances of its shareholders or directors, and they are only liable for the amount of money invested in the business.

Another significant difference between the two is the amount of paperwork required. Sole traders have minimal formalities, while limited companies have more reporting and management obligations. Limited companies must register with Companies House, file accounts, and adhere to rigorous record-keeping requirements.

Advantages & Disadvantages

Before you make any decisions about the legal structure of your business, it is best to know the advantages and disadvantages of both setups, as one size does not fit all! 

Advantages of Being a Sole Trader

• Quick to start: You can begin immediately with no legal paperwork for HMRC, companies’ house or bank accounts to set up. 
•  Complete control: With no shareholders or investors to worry about, you fully control how to run your business. 
•  Less paperwork: There are fewer tax returns and legal paperwork to take care of as a sole trader. 
•  Retain profits: Any profits you make are 100% yours, minus any tax owed. 

Disadvantages of Being a Sole Trader

• Liability: 100% of the business liabilities, from tax to debts, are yours. If you go bankrupt or have debts, your personal assets, such as your home or car, are at risk. 
•  Investor limitations: It is harder to raise finance or attract investors as a sole trader. 
•  Credibility: Operating as a sole trader is seen as less credible than a limited company. 
•  Less tax efficiency:  Sole traders have fewer tax allowances and schemes than a limited company. 

Advantages of Being a Limited Company

• Limited liability: If the business has debts or closes owning money, you are only liable for a limited portion, equal to the amount you invested in the company. 
•  Better funding options: It is easier to attract investors and funding as a limited company. 
•  More tax efficiency: There are more tax allowances and tax offsetting schemes for limited companies. 

Disadvantages of Being a Limited Company

• It takes time to set up:  Getting bank accounts in place and registering the company with HRMC and Companies House can take a little time. 
•  Less privacy:  Company accounts are publicly accessible by Companies House. 
•  More costs: Limited companies can have increased costs, but tax savings usually offset these. 

Transitioning From Sole Trader to a Limited Company

If you are already operating as a sole trader and thinking of switching to being a limited company, there are a few things you will need to know. 

Here are the main things you will need to think about and enact:

• You will need to start taking a salary and dividends from the limited company, and all the profits need to be retained. 
•  You will be required to get a business bank account.
•  You will still need to complete a SATR return. 

If you are thinking of making the switch, it is advisable to speak with an accountant first to ensure it is the right decision. A good accountant can look at your finances and help you formulate a plan to ensure moving over to limited goes without a hitch. 

How Can RJF Accounting Help?

RJF Accounting is a team of accountants based in Manchester and Macclesfield, specialising in startup accounting. We are well-positioned to help you if you are considering the move to a limited company set up with your business or founding a new startup! We offer a wide range of accounting services that can help you get started and grow as you begin your self-employed journey, including accounting, bookkeeping, investor relations and more!