Limited Company vs Sole Trader

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Starting a business and becoming your own boss can be complicated and a little scary, but TaxBite is here to make your life easier. We’re going to take you through the differences between a Limited Company and a Sole Trader so that you can make the right decision for you.

What is a sole trader?

If you decide to run your business registered as a sole trader, you will be solely responsible for your business. So, you are able to hire staff, but you are the only person who owns and controls the business itself. Therefore, any losses and debts incurred by your business are your responsibility, and you are liable. 

A benefit to being a sole trader with these liabilities means you can also take home after-tax profits.

Advantages of running your business as a sole trader:

Keep The Profits

As mentioned above, you are the business’s sole owner, so all the profits after you’ve paid tax are yours. In addition, sole traders are personally taxed on any profits or losses of a sole trade, so they are then able to save tax on other income from employment elsewhere.

Disadvantages of running your business as a sole trader:

Loss Liability

There are a couple of disadvantages to running your business under a sole trader. Namely, the liability is entirely on sole traders. In addition, for any losses, their business makes, sole traders may need to lose personal assets in order to repay any debts. This is because there is no legal distinction between sole traders and their businesses.

Registering as a limited company may be more suited if you’d like a legal separation between the company and yourself.

Accountability

Being a sole trader also means you’ve got no one to make vital decisions about the business with. Any decisions are your own, and the accountability falls on you, too! 

What is a limited company?

A limited company is essentially the creation of a private organisation to run your business. This will be a separate legal entity to you, so it is separate from your personal assets. 

A limited company director’s fiduciary responsibilities take away liability from you compared to registering as a sole trader.

Advantages of running your business as a limited company:

Tax Efficiency

There are several advantages of running your business as a limited company. To start, being a director, you are able to pay yourself both a salary and dividends, and you won’t attract National Insurance. This is a more tax-efficient way of working, as dividends have a lower tax threshold than salaries do. Finally, a salary can be paid out to the director (owner) and the self-employed.

Legal Protection

If the business should incur any debt or losses, shareholders in the limited company have limited liability, so they are not personally liable. Limited companies have their own legal identity and are separate from the business owner or owners. The only exception is if you have provided a personal guarantee to a creditor or have chosen not to pay your tax bill.

Shareholders

It’s also worth noting that if a shareholder wishes to leave the business, it can be done much more efficiently than in another business structure.

Investor Opportunity 

Investors tend to be more susceptible to investing in limited companies, as sole traders hold all responsibility for any debts incurred, so there is a lot more risk. In addition, registering and investing in limited companies is more favourable as assets are legally separate.

Disadvantages of running your business as a limited company:

More Paperwork

The only clear disadvantage of registering as a limited company over a sole trader is that tax requirements can take more time and involves more paperwork. 

This is where hiring a specialised Tax Bite chartered accountant to help file your corporation tax return, annual accounts, self-assessment, personal finances, and business finances is advantageous.

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Choosing between a sole trader and a limited company

There are a few key points to note when weighing up the difference between a sole trader and limited company. 

Choosing to register as a sole trader and a limited company director depends on whether you want to be personally responsible for the business, whether you want to work alongside others or just as one person, how you’d like to form your business structure, and how tax efficient you’d like to be. 

If you run your own business, want to remain the sole business owner, don’t want to pay corporation tax, want your business structure to remain as just one person, and don’t mind the business losses legal responsibilities of a sole trader, then we’d recommend doing so.

On the other hand, if you want to avoid unlimited liability, want to be more tax efficient, want to keep personal and business assets separate, and would like to involve multiple company owners. We recommend registering as a limited company.

Get in touch with the specialists at TaxBite, and we’ll be happy to help you decide whether you should register as either a sole trader or limited company in companies house and abide by the rules outlined in the Companies Act 2006.

Our team are on hand to explain all the details relevant to your decision and personal circumstances. 

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Switching from sole trader to limited company could save you tax

Every business owner loves the thought of saving more tax, and switching from a sole trader to a limited company could indeed make you more tax efficient. As a sole trader, you pay Income Tax and National Insurance on any profits. 

On the other hand, limited companies don’t have any N.I to pay, and only pay Corporation Tax on profits, which is also at a lower tax percentage than Income Tax.

Remaining as a sole trader would mean you’d have to continue making income tax payments on your accounts. The way in which these payments are made has been known to result in issues relating to the cash flow of some businesses.

It’s worth noting that since April 2016, when the taxation of dividends was amended, the tax savings relating to limited companies are not as extensive as they used to be. Still, choosing to register as a limited company over a sole trader means you will be more tax efficient with more legal protection.

We recommend talking to a specialist accountant to calculate if your current business structure can be more tax efficient. For help with registering limited companies via companies house, contact our team today!

How can Tax Bite Help

Deciding what business structure is best for you can be confusing, but the team at TaxBite are here to help simplify the process. Our chartered accountants are available to help you switch from a sole trader to a limited company and outline all the benefits your business will gain by changing. 

From setting up a business bank account to setting up your limited company in companies house, our team are on hand to take the burden from you. 

Our accountants can discuss the benefits of both limited companies and sole traders and help you understand the legal structure, key differences, and how to maximise your income for tax purposes.

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Whether you are a self-employed person, new business, small business, or large entity, our chartered accountants want to help you today. Talk with our specialised team to discuss whether you’d benefit from registering as a sole trader or limited company. 

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TaxBite’s best advice team is happy to explain the legal difference between a sole trader vs limited company, tax reliefs, and the ways in which your current legal structure could be more tax efficient. 

We have helped many small businesses, start-ups, Entrepreneurs, large businesses, and more to simplify their accounts process. We’d be delighted to hear from you!