Sole Trader Vs Limited Company

Sole Trader Vs Limited Company- What is better?

Blog

Sole Trader VS Limited Company-What is better?

When starting a small business, one of the first things to decide is the legal structure use for the business. It can either be a sole proprietorship or limited company or a partnership. Setting up as a sole trader is the most popular legal structure in the UK, with approximately 3.5 million sole proprietorships in 2020. Sole traders accounted for 59% of small businesses in the UK. There are also 2 million limited companies, making it the second most popular legal structure.

There is a significant difference between running business as a sole trader or as a limited company. Many people may not know it or do not understand it properly. Here in this blog, we will evaluate those differences.

Accounting and Tax Return Policies

  • Sole Trader: It is simpler to handle the annual accounts as a sole trader. You do not have to keep as many details are you have to if trading as a limited company. International accounting standards may not apply as you will be submitting the tax return. Which you will follow HMRC rules instead.
  • Limited Company: It is a little complicate for limited companies as all the compliance should be in accordance with the Companies Act format and according to GAAP. Compliance for HMRC is also necessary hence you are dealing with two different bodies at the same time.

Profit Extractions

  • Sole Trader: Being a sole trader of a running business, all the profit that the business earns will become the property of the sole trader alone after the certain tax deductions and NICs.
  • Limited Company: Because a limited company is a separate entity from its owners and shareholders, the owner will have to extract the profits through dividends which are subject to taxes.

Perception

  • Sole trader: A sole trader legal structure for your business is the easiest to set up. That’s why it has been proven to be such a popular option. However, there are clear advantages to running your business through a limited company structure. Before making a decision, it’s important that all factors are considered. Ensure that you have weighed up the pros and cons of all legal structures to see what fits you and your business best.
  • Limited company: A limited company may come across to businesses as a better model to work with than a sole trader. This again links back to the limited liability of a limited company. Businesses, contractors, clients etc. are more likely to work with a limited company as their perception is that a limited company is more professional. A limited company can build a good reputation. Which makes it more credible to any parties which want to work with your business.

 Tax Rate

  • Sole Trader: Tax rates are different for a different level of income. However personal allowance (tax-free amount) is given to sole traders. Which starts to reduce if profits are over £100,000/year.
  • Limited Company: Tax rate remains the same regardless of the level of income. However, there is no tax-free profit in the company. For a limited company, you will most likely require an expert to manage the company accounts.