If you’re just about to start your self-employed journey, you might have to make a decision as to whether you’ll set up as a sole trader or as a limited company. But, what’s the difference? How will this affect your small business?
According to the government, there are 3.5 million sole traders and 2.0 million limited companies active in the UK as of the beginning of 2019! So, if you’re looking to become one, you’re not alone. Thankfully there’s plenty of information out there to help support you make the first step.
Let’s start off by defining each one and going into some more details.
Sole Trader
A sole trader refers to a self-employed person who owns their business alone. This is the most common structure of a business, primarily because it is the simplest and easiest to manage.
You can set up and establish yourself as a sole trader using the government website. This is a legal requirement if you become self-employed as the government needs to know how much tax you should be paying.
Limited Company
Setting up as a limited company is a lot more complicated than setting up as a sole trader. This is because a limited company assumes that the legal identity of the company is separate to the owner and manager.
In this instance, if you were to set up a limited company alone, you would be acting as both the shareholder and director.
Why choose to set up as a sole trader?
Setting up as a sole trader does have its benefits. Like we mentioned before, it has a much simpler business structure and is easier to establish.
As you’re not required to establish owners or directors, there is less paperwork required than a limited company and more privacy as a result
The downside to not having owners or directors means you, as the sole business owner, are entirely responsible for any debt or liabilities incurred by the running of your business. This is a big risk as it means you are financially responsible for the business!
Raising capital to help cover the loss is also much harder if you’re a sole trader.
Whilst tax rates may increase massively as you grow, they are fairly reasonable when you start out. There’s nothing preventing you from establishing yourself as a limited company once your company has outgrown it’s small business status.
Why choose to set up as a limited company?
When you set up a limit company, your details can be found via Companies House. This lack of privacy can be a concern for some people – but it comes with huge benefits. For one, nobody else can establish a business under the same name! Sole traders don’t get this benefit.
As we mentioned before, as a sole trader you would be entirely liable for the liabilities accrued by your business. As a limited company, however, you also have limited liability. That means you can only lose what you invest into the company and your personal assets are not liable.
Rather than paying income tax like a sole trader, you would pay corporation tax which is somewhat more lucrative. Registering as a limited company could prove to be more profitable. As well as this, there are more tax-deductible costs you can claim.
The downside? Well, there are a number of extra responsibilities required for the director of a limited company. The time you invest into running a company, as well as managing the financial tracking, could be costly.
Our final say
Ultimately the decision here is yours. Understanding the difference between a sole trader and a limited company is an important step in becoming self-employed. Choosing which one is by no means an easy decision but each comes with it’s benefits.
When you decide to make that leap and become self-employed, you need to do everything you can to give yourself a fighting chance. Doing your research is a good place to start, so check out some of our other guides for more information on setting up your own business.
If you’ve set up a small business and need help tracking your finances, take a look at Count’s service.