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Sole Trader vs Limited Company: Choosing the right legal structure for your business

Starting a small business can be an exciting and rewarding journey, but it can also be overwhelming, especially when it comes to deciding on the legal structure. Two of the most common legal structures for small businesses are sole trader and limited company. As a business owner, it’s important to understand the differences between these two options. While both options have their advantages and disadvantages, ultimately the decision comes down to factors such as personal liability, taxation, and growth plans.

In this article, we explore the pros and cons of each option and provide you with the information you need to make an informed decision. So, whether you’re just starting out or looking to switch legal structures, read on to find out which option is the best fit for your business.


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What is a Sole Trader?

A sole trader is a self-employed individual who is the sole owner of their business. This means that they are responsible for all aspects of the business, including finances, marketing, and operations. Sole traders are not required to register their business with Companies House, and they do not have to pay any registration fees. They are also not required to file annual accounts or annual returns, although they will need to keep accurate records of their income and expenses for tax purposes.

One of the main advantages of being a sole trader is the simplicity of the legal structure. Sole traders can set up their businesses quickly and easily, and they have complete control over the business. They can make decisions without having to consult with anyone else, which can be beneficial in fast-moving industries. Additionally, sole traders can keep all the profits from their business, which can be a significant advantage in the early stages of a startup.

However, there are also several disadvantages to being a sole trader. One of the main disadvantages is personal liability. Since sole traders are not a separate legal entity, they are personally liable for any debts or legal issues that arise from their business. This means that their personal assets, such as their home or car, may be at risk if their business runs into financial trouble. Additionally, sole traders may find it difficult to raise finance, as lenders may be less willing to lend money to an individual than to a company.


What is a Limited Company?

A limited company is a separate legal entity from its owners. This means the company has its own legal identity, and the owners are not personally liable for any debts or legal issues that arise from the business. Limited companies are required to register their business with Companies House and file annual accounts and annual returns. They are also required to have at least one director and a registered office address.

One of the main advantages of having a limited company is reduced personal liability. The owners of a limited company are not personally liable for any debts or legal issues that arise from the business. This means that their personal assets are protected if the business runs into financial trouble. Additionally, limited companies may find it easier to raise finance, as lenders may be more willing to lend money to a separate legal entity than to an individual.

However, there are also several disadvantages to having a limited company. One of the main disadvantages is increased complexity. Limited companies are required to comply with a range of legal and administrative requirements, which can be time-consuming and expensive. Additionally, limited companies are required to pay corporation tax on their profits, which can be higher than the income tax paid by sole traders.


Sole Trader Advantages

Simplicity

One of the main advantages of being a sole trader is the simplicity of the legal structure. Sole traders can set up their businesses quickly and easily, and they have complete control over the business. They can make decisions without having to consult with anyone else. This can be particularly beneficial in fast-moving industries. Additionally, sole traders can keep all the profits from their business, which can be a significant advantage in the early stages of a business.

Less Admin

Another advantage of being a sole trader is reduced administrative burden. Sole traders are not required to register their business with Companies House, and they do not have to pay any registration fees. They are also not required to file annual accounts or annual returns. Although they will need to keep accurate records of their income and expenses for tax purposes.

Flexible

Finally, being a sole trader can be a more flexible option. Sole traders can work from home and use a virtual office or shared office space, and they can work the hours that they choose. This can be particularly beneficial for those with family or other commitments, as it allows them to work around their other responsibilities.


Sole Trader Disadvantages

Liability

One of the main disadvantages of being a sole trader is personal liability. Since sole traders are not a separate legal entity, they are personally liable for any debts or legal issues that arise from their business. This means that their personal assets, such as their home or car, may be at risk if their business runs into financial trouble. Additionally, sole traders may find it difficult to raise finance, as lenders may be less willing to lend money to an individual than to a company.

Limited Growth Potential

Another disadvantage of being a sole trader is limited growth potential. Since sole traders are limited by their own resources, they may find it difficult to expand their business. This can be particularly challenging in industries that require significant investment in equipment or premises.

Responsibility

Finally, being a sole trader can be a lonely experience. Since sole traders are responsible for all aspects of their business, they may find it difficult to get support or advice from others. This can be particularly challenging in industries that are constantly evolving, as it can be difficult to keep up with new developments without the support of others.


Limited Company Advantages

Limited Liability

One of the main advantages of having a limited company is reduced personal liability. As mentioned earlier, the owners of a limited company are not personally liable for any debts or legal issues that arise from the business. This means that their personal assets are protected if the business runs into financial trouble. Additionally, limited companies may find it easier to raise finance, as lenders may be more willing to lend money to a separate legal entity than to an individual.

Credibility

Another advantage of having a limited company is increased credibility. Limited companies are seen as more professional and trustworthy than sole traders, which can be beneficial when dealing with clients or suppliers. Additionally, limited companies have a greater sense of permanence, as they are not reliant on the continued presence of the owner.

Tax Efficiency

Finally, having a limited company can provide greater tax efficiency. Limited companies are required to pay corporation tax on their profits, which can be lower than the income tax paid by sole traders. Additionally, owners of limited companies can pay themselves a salary and dividends, which can be a more tax-efficient way of taking money out of the business.


Limited Company Disadvantages

Complexity

One of the main disadvantages of having a limited company is increased complexity. Limited companies are required to comply with a range of legal and administrative requirements, which can be time-consuming and expensive. Additionally, limited companies are required to pay corporation tax on their profits, which can be higher than the income tax paid by sole traders.

Less Flexibility

Another disadvantage of having a limited company is reduced flexibility. Limited companies are required to have at least one director and a registered office address, and they must file annual accounts and annual returns. This can be restrictive for those who prefer a more flexible approach to running their business.

Higher Costs

Finally, having a limited company can be more expensive than being a sole trader. Limited companies are required to pay registration fees and ongoing administrative costs, which can add up over time. Additionally, limited companies may require the services of an accountant or lawyer to ensure that they are complying with all legal and tax requirements.


Tax Implications: Sole Trader vs Limited Company

Taxation is an important consideration when deciding on the legal structure of your business.

Sole traders are taxed on their profits as income tax, while limited companies are required to pay corporation tax on their profits. The current rates of income tax and corporation tax are as follows:

Income Tax:

  • 20% on profits up to £50,000
  • 40% on profits between £50,001 and £150,000, and
  • 45% on profits over £150,000.

Corporation Tax:

  • 19% on profits up to £300,000, and
  • 30% on profits over £300,000.

As mentioned earlier, limited companies can pay their owners a salary and dividends, which can be a more tax-efficient way of taking money out of the business. However, it’s important to note that the rules surrounding dividends have changed in recent years, and it’s important to seek professional advice to ensure that you are complying with all legal and tax requirements.


Legal considerations are another important factor to consider when deciding on the legal structure of your business. Sole traders are not a separate legal entity, which means that they are personally liable for any debts or legal issues that arise from their business. Limited companies, on the other hand, are a separate legal entity. This means that the owners are not personally liable for any debts or legal issues that arise from the business.

Additionally, limited companies are required to comply with a range of legal and administrative requirements, which can be time-consuming and expensive. This includes registering the business with Companies House, filing annual accounts and annual returns, and maintaining accurate records of all financial transactions.


How to Choose Between Sole Trader vs Limited Company

Choosing ultimately comes down to your personal circumstances and the needs of your business.

However, here are some factors to consider when making your decision:

  • Personal Liability
    If you are concerned about personal liability, a limited company may be the best option for you and offer greater protection.
  • Taxation
    If you are looking for greater tax efficiency, a limited company could be the better option.
  • Flexibility
    If you value flexibility and simplicity, being a sole trader may be the best place to start.
  • High Growth Potential
    If you are looking to scale your business rapidly, a limited company may be the best option. Though do keep in mind that you can start out as a sole trader and change the company structure later.


Ultimately, the decision comes down to your individual circumstances and the needs of your business. It’s important to seek professional advice before making a decision, as there may be other factors to consider that are specific to your situation.


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We understand the challenges that small business owners face in running their businesses cost-efficiently. That’s why we offer a range of Virtual Office and Registered Company Addresses that can help you establish a professional image, streamline operations, and save costs. 

With our virtual office solutions, you can enjoy a prestigious business address and professional Virtual Receptionist services, all at an affordable price. Our flexible plans allow you to choose the services that best suit your needs, so you only pay for what you use. 

Virtually There is dedicated to helping small business owners thrive in today’s competitive business landscape. Get in touch to find out more about how we can help you scale your business.
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Paul Sandquest

Head of Marketing

Paul is Head of Marketing at Virtually There and has over a decade of experience supporting businesses across the globe.

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