Sole Trader or Limited Company – Which One is Best

Sole Trader or Limited Company

Are you keen to start a business but experiencing a dilemma about your business structure? You are not alone. Everyone wants to have the most suitable structure for their business. You have several options like Sole Trader, Partnership, Limited Liability Partnership (LLP), Limited Company, Community Interest Company (CIC), and Charitable Incorporated Organisation (CIO). However, the most popular business structures are Sole Trader and Limited Company for years. Now, which is best among these two is a tricky question to answer as both have their own set of advantages and disadvantages that are important to know thoroughly to make an informed decision.

Understanding the structure of Sole Trader

A sole trader is the simplest type of business structure: the sole trader where you are the sole owner and operator. According to estimation by the HMRC, a whopping 60% of UK businesses choose this structure. This may be attributed to several factors, such as minimal administrative burden, complete control, profit retention, and low cost of set-up. No wonder, this business structure has always been the choicest option of freelancers and consultants. Also, if you look from the accounting perspective, the financial requirements are pretty straightforward. There is no need to maintain a separate business account as in the case of a limited company. You need to only fill out a self-assessment form annually.

Understanding the structure of a Limited Company

On the other hand, limited companies are well-defined legal entities that are separate from their owners, because of which there is minimal risk to personal assets in the wake of a crisis. Many entrepreneurs choose to set up a limited company for their business due to factors such as limited personal liability, payment of corporation tax instead of income tax, ability to sell shares of the business to new investors for raising funds, more credibility as a business, and so on. However, from the accounting perspective, its financial requirements are a bit complex. For example, if you have set up a limited company, you must maintain a record of all your transactions, prepare financial statements and, most importantly, adhere to tax regulations.

Choosing the Right Option for Your Business

So, the business structure that can be best for you among these two options depends on various factors. For example, you need to think of the nature of your business, your own financial goals, your ability to tolerate risks, and long-term plans. While in a sole trader structure, there is personal liability, if you opt for a limited company, you will have limited liability. Remember that if things go wrong in your business, you can even lose all your personal assets as a sole trader, which can never be the case in a limited company. 
Moreover, if the aspect of taxation is discussed, there is a stark contrast between the two business structures. Rather than being subjected to corporation tax, as in the case of a limited company, your business gains will be subjected to income tax as a sole trader of a business. This is because business gains are looked upon as personal income. As a result, a sole trader often ends up paying more taxes in comparison to someone running a limited company.

You can also start as a sole trader, as the administration is relatively simple and easy. Over the years, as your business scales, you will always have the option to set up a limited company.

In case, you need any assistance to set up your own limited company or need help with establishing yourself as a sole trader, our skilled accountants and tax professionals can assist you at each step.