The main type of business structures that people usually opt for when starting a business is either a Sole Trader or Limited Company. Whether you’re just starting your business or considering switching business entities then hopefully this blog will help you to make your decision.
Once you’ve made your decision it’s advisable to reach out to a professional for support. By doing this you know that you have everything covered and you’re not missing anything which could later impact your business.
Legal status
The main difference between these two business structures is that a Sole Trader’s business finances are treated the same as their personal finances. Whatever you earn as a Sole Trader is your own. A sole trader is not a separate legal entity from its owner. Legally, the owner and the business are considered the same entity.
A Limited company differs from this because the finances belong to the company. This means personal and business finances are treated separately. You must have a separate business bank account from your personal account and any debt that arises is the liability of the business and not the directors. Any legal contracts are with the business and not with the individual shareholders.
Who’s in control?
A sole trader is a business owned and operated by a single individual. The owner has complete control over the business’s operations and decisions. A limited company is a separate legal entity from its owners, known as shareholders. It can have one or more shareholders, who can also be directors. When it comes to making business decisions directors must make decisions together.
Liabilities
A Sole Trader has unlimited liability, meaning they are personally responsible for all debts and liabilities of the business. In case of financial troubles, personal assets could be at risk to settle business debts.
As the name of a Limited Company suggests, the shareholders’ liability is limited to the amount they have invested in the company (their shares). Personal assets are generally protected from business debts.
Taxation
Income generated by the business is typically treated as the owner’s personal income. The owner pays income tax and National Insurance contributions on the profits by completing a self assessment with HMRC.
A limited company is subject to corporation tax on its profits. Shareholders are taxed on any dividends they receive, and employees are subject to income tax and National Insurance contributions.
Setting up the business
Setting up as a sole trader is relatively simple and involves registering with HMRC. There are fewer legal formalities compared to setting up a company. You can find out more about registering as a sole trader here.
Setting up a limited company involves more formalities. It requires registering the company with HMRC, defining the company’s structure, and complying with various legal requirements.There is a small fee for registering your business with Companies House.
Privacy
A sole trader tends to have more privacy of their personal details as their financial information and personal address are not displayed on Companies House.
As a director of a limited company some information may be available for the public to view on the Companies House website. Information such as financial statements and details of directors and shareholders is displayed but the separation between personal and business finances provides a degree of privacy.
Credibility
Limited companies are often perceived as more credible and stable entities, which can be beneficial when dealing with clients, suppliers, and investors.
The choice between being a sole trader and forming a limited company depends on various factors, including the scale of the business, liability concerns, tax implications, and personal preferences. It’s recommended to consult with legal and financial professionals to determine the best structure for your specific situation.
We’d be happy to support you on your journey. Remember having a finance team behind you means your accounts are more accurate, giving you a clearer insight into your business finances in order to future proof it.