Sole Trader vs Limited Company: Which is best for your startup?

Are you starting a new business and trying to decide whether to register as a Sole Trader or a Limited Company? 

This can be a difficult decision to make, as both options have their advantages and disadvantages. In this article, we explore the differences between a Sole Trader and a Limited Company to help you determine which one is right for your startup.
How Virtually There can help

What is a Sole Trader?

A Sole Trader is an individual who runs their own business as a self-employed person. This means that the business is not a separate legal entity, and the owner is personally responsible for all aspects of the business. As a Sole Trader, you’ll need to register with HM Revenue and Customs (HMRC) and complete an annual tax return.

Sole Trader Advantages:

1. Easy to set up
   Registering as a sole trader costs nothing. You must register with HRMC once you earn over £1,000 from self-employment in a single tax year.
2. Less paperwork
   As a Sole Trader, you will have fewer legal requirements to fulfil. This means less paperwork and lower costs.
3. Full control
   You have complete control over your business, which means you can make all the decisions. Plus it’s easy to change your company structure later if your circumstances change.
   

Sole Trader Disadvantages:

1. Unlimited liability
   As a Sole Trader, you are personally responsible for any debts or legal issues that arise from the business. This means that your personal assets could be at risk if the business fails.
2. Limited access to funding
   Sole Traders may find it more difficult to access funding, as banks and other lenders are often more willing to lend to Limited Companies.

What is a Limited Company?

A Limited Company is a separate legal entity from its owners (shareholders). This means that the company is responsible for its own debts and legal issues. As a director of a Limited Company, you will have legal obligations to fulfil, such as filing annual accounts with Companies House and submitting a corporation tax return to HMRC.

Limited Company Advantages:

1. Limited liability
   The main advantage of a Limited Company is that the liability of the shareholders is limited to the value of their shareholdings. This means that your personal assets are protected if the company fails.
2. Access to funding
   Limited Companies may find it easier to access funding, as lenders are often more willing to lend to them.
3. Tax advantages
   Limited Companies may benefit from tax advantages, such as lower corporation tax rates and the ability to claim tax-deductible expenses.

Limited Company Disadvantages:

1. More paperwork
   Limited Companies have more legal requirements to fulfil, and with this comes more paperwork! One of the primary drawbacks is that it involves a more complex setup process and ongoing administrative responsibilities. This includes filing annual accounts, maintaining statutory registers, and complying with various legal and regulatory requirements.
2. Greater scrutiny
   A Limited Company structure also comes with greater scrutiny and transparency, making it more challenging to maintain privacy around the business’s operations and finances.
3. Tax liabilities
   Limited Companies may also face higher tax liabilities than Sole Traders, particularly if profits are high. This can impact profitability in the long run.

Where to start

Starting out as a Sole Trader is advisable if you anticipate low business earnings. In fact, over 58% of the UK’s 5.8 million self-employed individuals are registered as Sole Traders, so you’ll be in good company! As your business grows, you can register with Companies House or switch to a Limited Company structure to potentially pay less tax.

We recommended seeking professional advice before making the switch to a Limited Company.

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.