When setting up a business one of the first considerations you will have to make is whether to operate as a limited company vs sole trader.

At its core, what this means down to the distinction between you and your business. A limited company structure keeps you distinct from your business, which means you don’t have liability, whereas if you’re a sole trader the law sees you and your business as the same which means you are personally liable for any debts or losses.

Put like that, it seems like limited company structure makes sense? Well, not necessarily. There are advantages and disadvantages to both.

Here are a few things to consider when making a decision between limited company and sole trader structure.

Do you like paperwork? Limited companies need more! 

Does anyone? If you decide to act as a sole trader there is relatively little paperwork, other than an annual self-assessment tax return. It’s much easier to set up than a limited company – you basically just get going, and keep regular records. For a limited company, you will need to use an accountant.

Does privacy matter? You’re better off being a sole trader.

If you set up a limited company you have to have details on your website, communications, and Companies House. These details include your address, which if don’t have an office, is likely to be your home address. Not everyone feels comfortable with this.

Do your clients have a preference? Some prefer limited companies. 

Some clients will only work with and pay out to limited companies. So think about who your clients are and how they are happy to work. You don’t want to  lose out on an amazing contract due to the structure of your business.

Do you want a tax break? Think limited company. 

Tax rates can be a bit kinder on limited companies than sole traders. Once you reach a certain level of earnings, entering the higher tax brackets, it might be more lucrative to be a limited company. Corporation tax is at a lower rate (currently 19%), and is only paid on profits, rather than overall earnings.

Are you trying to raise finance? Try being a limited company. 

Many investors will only work with limited companies. If you’re looking to get investment in the near future, it’s probably worth considering this as a company structure.

Do you need a salary? Sole trader is easier. 

When you want to take out money from your sole trader business you simply withdraw it, and make a note on your accounts. If you want a regular salary from your limited company you will need to set up a PAYE system, or you can make occasional payments in the form of dividends. As sole shareholder you are entitled to get all remaining profit after costs, expenses and tax.

Conclusion

There are approximately 3.5 million sole proprietorships and  1.9 million limited companies in the UK. Neither structure is better than the other – it all depends on what works for you. The question of Limited company vs sole trader is not always clear cut.  Whatever you choose, see how we can take the load off with our accounting services.

Get in touch with us to find out more about limited companies, sole traders, and business structures.  For more business and finance , news, advice and tips, don’t forget to watch our weekly broadcasts, listen to our weekly podcast I Hate Numbers.

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