Your checklist to easily compare the pros and cons of becoming a sole trader or a limited company
What are the 9 top differences? How do you know which company set-up is right for you and your business?
There are 3.2 million sole proprietorships and 4.7 million limited companies registered in the UK, but how do you know which company set-up is right for you and your business?
Keep reading and you will learn more about the main benefits and drawbacks of both setting up as a sole trader or forming a limited company.
1. Financial Liability.
This is the biggest difference between the two types of businesses. As a sole trader, if your business runs up any debt you are legally required to cover it, this may mean even selling personal assets. By setting up a limited company your business becomes a separate legal entity. Therefore, if the business does run up debts then the business, rather than you personally, is responsible. This is why Credit Passport® provides a business credit score for Limited businesses, which is separate to the score an individual receives.
2. Status.
You can build a great reputation as a sole trader and many customers won’t know the legal ‘status’ of your business or, to be honest, care! They are there for your amazing products and service after all. Having said that, some suppliers & clients may feel more secure dealing with a company that has gone through the formation process.
3. Finance options available to your business.
Along with being financially liable for the business, raising funds may be more difficult as a sole trader. Options as a sole trader include savings, friends & family lending, go fund me pages, and some banks will loan you money however you may be considered too ‘high risk’ and refused. But if your over-heads are low and your cash flow good this may not be a concern for you.
As a limited company, you will have more financial options open to you and be more likely to be approved for a loan from a bank or lending organisation. All the options of a sole trader will be available to you along with more official routes. If you need a premises to operate from, need to buy equipment or require some start-up cash to get you going forming a limited company will make it easier when applying for finance.
4. Personal details being public record.
Being a sole trader, you will have increased privacy. Your personal details won’t be published on Companies House. There is no legal requirement for sole traders to register as a business with the government however you will need let HRMC know you are trading.
When forming your limited company, you will have to publish your name (as a director), the names of fellow directors and your business address on Companies House. You can limit the amount of information out there by registering with a secretarial business service, but some details have to be made public.
5. Protecting your business name.
As a sole trader you may be worried about others operating with a similar name to take advantage of your good reputation, advertising efforts and word of mouth promotion from customers. It is advisable to take some form of Intellectual Property (IP) protection out on your name or brand.
No one can use the exact same business name as you as a limited company, they legally won’t be able to form the company. However, this doesn’t cover you in every situation, they could add an ‘s’ to the name or ‘solutions’ etc so their name ends up being very similar to yours. If you are concerned speak to an IP specialist or lawyer.
Banner: Find out how Start.Biz and their in-house services (National Business Register) could help you protect your business name and IP from just £99 per annum.
6. Tax.
Tax can be substantially higher for sole traders, especially when you’ve established the business and are pulling in a good amount of money. Sole traders can be charged between 20%-45% tax on their profits (minus allowable business expenses).
Tax for limited companies is lower and they are generally considered more ‘tax efficient’. They are required to pay only 19% on their total profits (minus allowable business expenses).
7. Administration requirements.
There is less paperwork to do as a sole trader while limited companies are legally required to submit more paperwork. For both types, engaging an accountant is a great idea, they will be able to help you with all the paperwork and requirements. We would also recommend having some accountancy software to help with the day-to-day running of your business. There are many available on the market, which could help you run your business more efficiently.
8. Employment.
You can employ people as a sole trader. Make sure you have insurance and are set up correctly with a PAYE scheme and pensions with HRMC. This is where an accountant will come in handy. These requirements are the same for a limited business. Note that working with freelancers or contractors does not require you to set up a PAYE scheme and pensions with HRMC.
9. Insurance.
As a sole trader you are less likely to need different kinds of insurance but you are legally required to take out Employer’s Liability (EL) insurance if you employee anyone, even on a casual basis. This is the same for a limited company. Some contractors will request you have EL insurance, ensure this is clarified in the contract before starting to work with them. If you have employees and operate without EL insurance you could receive a fine of up to £2,500 per day.
Other types of insurance to consider include professional indemnity insurance and public liability insurance, these are not legal requirements but depending on the nature of your business they may be a wise investment.
