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Sole Trader Or Limited Company? (UK)

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.

Find out all you need to know about setting up and running a sole trader here.

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.