Sole trader or a limited company?

4th October 2018

One of the most common questions we get asked by new start-ups is should I be a sole trader or a limited company?

This wholly depends on your individual circumstances, as your current position and future goals will determine which route you should go down. However, we’ve highlighted some differences between the two to offer a general overview.

A sole trader is the simplest business structure available and certainly comes with its advantages. Generally, the set up process for a sole trader is simple. The business owner will be subject to minimal paperwork throughout the year and it offers greater privacy as information cannot be found freely on Companies House.

However, the owner of a sole trade is personally liable for the businesses debt, meaning that if things go wrong, the owner’s personal assets are at risk. Sole traders may also find it difficult to raise finance to encourage growth, as banks and investors often prefer to invest in limited companies.

Setting up as a limited company provides a legal distinction between the owners and managers, therefore personal assets are not at risk if the company finds itself in hot water. But running a limited company also comes with greater responsibility. A limited company must prepare a range of paperwork annually, which can be costly and time consuming. You can sort this paperwork yourself but in most cases, this can have a negative impact on the day to day running of the business. We’d recommend at this stage to appoint an accountant to complete this work for you, as their advice and expertise will be invaluable.

Taxing your income

How you set up your business will affect what tax you pay, when and how.

A limited company gives the owner the flexibility to take money out of the company to suit their personal tax needs, whether that is as a salary through PAYE, as dividends, or a combination. However, both are subject to personal tax at different rates depending on your total income. Limited companies also pay corporation tax on profits, which is currently set at 19%.

If you are self-employed, you simply pay income tax on the total profits of the business at the prevailing rate depending on your tax band. If your earnings are unlikely to exceed the basic tax rate threshold (currently £46,350), financially you may be better off as a sole trader. This is not always the case, however, and advice should be taken accordingly.

Ultimately, it’s necessary to take a look at your own situation in full to determine the best route to take.

For more information or guidance on setting up a business, email or contact John Walton on 01926 422292.