Whether you are new to trading, or your business is growing and you are wondering what the next steps should be, there may be a question playing on your mind; sole trader or limited (by shares) company, which is best for me?
As of 2023, there were 5.5 million businesses in the UK. Of this, 3.1 million (56%) were sole traders and 2.1 million (37%) were actively trading limited companies. This shows that being a sole trader is a popular business structure, but is it the right choice for you? In this article, we aim to inform you of both the benefits and downsides of being a sole trader and a limited company.
Advantages of a limited company
- Your company name is registered, which offers protection and prevents anyone using the same name.
- Limited liability protects the shareholders personal assets as their liability is restricted to any unpaid amount on the shares they hold.
- Perceived as more reliable and trustworthy than a sole trader due to the transparency and strict requirements offered by the Companies House register.
- Corporation tax (currently 19%) is likely to be more tax efficient than paying income tax (20-45%) as a sole trader.
- The company and shareholders are considered two separate legal entities.
Disadvantages of a limited company
- Less privacy due to personal details being featured on the Companies House public register, including the residential address if used as a registered office and service address.
- More requirements including annual filings, updates that must be filed within 2 weeks and record keeping rules.
- Late filing penalties can reach up to £3,000 and the company can be struck off the Companies House register for failing to comply with filing requirements, evidence of this will be available on the register.
- Competitors can see the financial health and compliance of the company.
- Decisions cannot be made by one person alone (unless all shares are held by one person) and will require resolutions to be agreed by a majority.
Advantages of a sole trader
- You can begin trading immediately.
- Less paperwork as you only need to file a self-assessment tax return annually.
- Owned and run by just one person so you do not need to consult anyone else to make decisions.
- After tax, all profits can be retained by the sole trader.
- There is no register for sole traders, which affords more privacy as no personal details are available for public viewing.
Disadvantages of a sole trader
- No protection for your business name so it can be registered by someone else, which risks tarnishing the reputation you have worked so hard to create.
- No co-owners to provide support or cover for holidays or sickness.
- No legal separation between the owner and the business, so personal assets will be at risk should the business have debts.
- Seen as less credible by some which may limit investment opportunities or be a concern for customers. This implication will need to be considered if your business will depend on winning contracts or working with other companies.
- Less tax efficient as income tax will need to be paid on all profits, ranging from 20-45%.
- Self-assessment tax returns can be difficult if you are not confident on what you are doing, which can be costly if mistakes are made. It would be advisable to hire an accountant.
Every business is different, and what works for one may not necessarily work for another. We cannot tell you which structure you should choose, but hopefully this article will help you make an informed decision as to which is best for you.
If you would like to speak to an accountant about the implications of being a sole trader or transferring assets into a limited company, contact us today for a free, zero-obligation referral to our trusted accounting partners.
Also Read: Registered Office: Requirement Update
