Sole Trader vs. Limited Company

One of the biggest decisions when setting up as a business is whether to go down the sole trader or limited company route. Fortunately, we've put together a guide to give you all the details for an informed decision.

The road to starting your own business is full of difficult decisions. But one of the most important choices is deciding whether to set up as a sole trader or as a limited company. Picking the wrong route could have long-term implications for your business, and it could even stifle future opportunities when it comes to getting new clients.

Below we'll look at the pros and cons of each, as well as how to get set up. So, let's get started.

What is a Sole Trader?

A sole trader is self-employed and runs their own business as an individual. The company and the person are not separate entities—so, as a sole trader, you're personally responsible for any losses the business makes. Likewise, you keep all of the profits after you've paid tax on them.

Sole traders are personally responsible for recording all financial affairs of their business. This includes sending a Self Assessment tax return every year and registering for VATifn your takings are over the VAT threshold.

What is a Limited Company?

A limited company is a business that is an entity in its own right. That means it is separate from the individuals who own the company, and their liability is limited to the investment they made. (hence the name 'limited').

Limited companies tend to work on a 'shares' basis. Shares mean that the company is divided into smaller portions with a monetary value attached. These shares are then distributed among the shareholders.

All limited companies in the UK need to be registered with Companies House, and they must follow the rules laid out by the Companies Act of 2006.

What is the Difference Between a Sole Trader and a Limited Company?

Let's take a look at some of the key differences between operating as a sole trader and a limited company:

The Pros and Cons of Being a Sole Trader

Let's take a look at some of the positives and negatives of becoming a sole trader:

Pros

Cons

The Pros and Cons of Working Through a Limited Company

Next up, we'll go through some of the pros and cons of setting up a limited company:

Pros

Cons

How do I Become a Sole Trader?

Setting up as a sole trader is a pretty simple process. Firstly, you'll need to let HMRC know that you're now self-employed. Then, you'll need to register for Self Assessment as a sole trader. Remember, you'll need to have a business name ready when you register.

After that, you're pretty much good to go (provided you have any industry-specific licences in place).

If you are a sole trader, take a look at our sole trader accountancy packages.

How do I Become a Limited Company?

There's no denying that there's more paperwork involved when setting up a limited company versus getting started as a sole trader. Fortunately, there are specialists who can help you through the process in a simple, quick, and cost-effective way.

Here at SJD, we can form your limited company online in just five minutes. That includes setting up your company bank account and registering your company for VAT and PAYE.

You'll also need to appoint an accountant, who'll be able to advise you on the most tax-efficient way of working through a limited company. We can help there, too. Check out our guide on finding out what an accountant can do for you.

Sole Trader or Limited Company?

So, we've looked at the definitions and the differences between a sole trader and a limited company. But which is the right choice for you? Well, the short answer is: it depends.

If you're comfortable staying as a small business and are satisfied with paying more tax. There's no reason why working as a sole trader wouldn't be suitable.

But if you think you'll want to grow your business, operating as a limited company might be the best option. Clients and investors will see you as more credible, and your personal assets won't be at risk as a limited company.

Conclusion

There's no doubt that deciding whether to set up a limited company or as a sole trader is a big decision. But we hope this guide has helped inform you about making the best choice for you and your business.

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How can SJD Accountancy help?


Appointing an accountant can save you time and stress when starting up on your own. If you would like to speak to someone about any of the above information or any other queries you may have, arrange a callback and a member of the team will be in touch.

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