Sole Trader or Limited Company in the UK: Which is best for you?

Are you a sole trader that would benefit from becoming an incorporated Limited Company?

Choosing a legal structure is one of the most important decisions a new business owner needs to make and can be one of the most difficult to understand. The hardest part, is that the best option is dependent on your personal circumstances too. This article highlights the two different types of business structures, each with their own advantages and disadvantages.

A sole trader:

A sole trader is owned and controlled by one person.
There is an unlimited personal liability for the business meaning a sole trader is personally liable for all the business’ debts and obligations, and there is no legal distinction between the owner and business.

Limited company:

Ownership through holding shares in the business.
A limited company’s finances are separate from the shareholders’ or directors’ personal finances. This means that the shareholders are only liable for the amount they have invested in the business, and any personal assets are protected from business debts.
A limited company is managed by directors who are appointed by the shareholders, and it is required to comply with various legal and regulatory requirements.

Key differences between sole trader and limited company

Liability: As mentioned, a sole trader has unlimited liability for the debts and obligations of the business, while a limited company has limited liability.
Taxation: Sole traders are taxed as individuals, and their business profits are subject to income tax and national insurance contributions. Sole traders can take advantage of certain tax benefits, such as deducting business expenses from their taxable income, which can reduce your overall tax liability. However, sole traders may also be subject to higher tax rates than corporation tax. In contrast, limited companies are taxed as separate legal entities, and their profits are subject to corporation tax. Shareholders in a limited company may also be eligible for certain tax credits and allowances, and receive dividends, which are taxed separately, with a £2,000 per annum tax allowance.
Structure: A sole trader business is the simplest and easier type of business structure to set up and manage, and there is no need to register with Companies House or file annual reports. This may limit scalability and potential growth of the business by limiting access to funding and resources. Whereas limited companies are generally more scalable as they can raise capital through the issuance of shares and attract investors to fund their growth. This can help the business to expand and reach new markets.
Financing: Limited companies have more options for financing, such as issuing shares or obtaining loans from banks or other financial institutions. Sole traders may find it more difficult to access funding, especially if they have a poor credit history. This may hinder the future growth of your business.
Management and control: Sole traders have complete control over their businesses, while limited companies are managed by directors who are appointed by the shareholders. Shareholders have limited control over the day-to-day operations of the company.

In Summary, the decision to operate as a sole trader or a limited company depends on various factors, such as the size and nature of the business, the level of personal liability the owner is comfortable with, and the tax and financial implications of each structure.

We at Dragon Argent, are happy to provide professional accountancy, tax and legal advice to help you make the best decision for your business. Book a discovery call by clicking below.

Schedule a discovery call

Author

Amelia Smith

Client Manager

Email - amelia.smith@dragonargent.com

LinkedIn

Back to blogs

webinars FOR FOUNDERS

Featured

An Introduction to Private Client Law: Webinar 2 – Lasting Powers of Attorney

There may be a time when you can no longer make or communicate your own decisions. Having a lasting power of attorney in place can save considerable time and costs if the worst should happen – so it's worth considering now. A power of attorney is a legal document that appoints someone – your 'attorney' – to make decisions on your behalf.

Protect your Business Intellectual Property: Copyright, Trademark & Design

From creations to brand names, this session equips you to identify and protect the intellectual goldmine within your business and how best to protect them. Take control of your IP, generate income and secure funding.

Recorded Webinar 1: An Introduction to Private Client Law: Navigating Wills, Trusts, Estate Planning, and Inheritance Tax

In an era marked by evolving legal landscapes and complex family dynamics, understanding the intricacies of estate planning has never been more crucial. Partner and Head of Private Client James McMullan at West End Solicitors, RIAA Barker Gillette UK, presents an insightful webinar on wills, trusts, estate planning and inheritance tax.

Join our panel discussion at The Business Show: How to protect and scale your business

Join the discussion and leave with a clear sense of funding rounds and the tax incentive landscape in the UK and how best to navigate it to aid commercial success.

Recorded Webinar: The Maternity Pledge and Maternity Leave

This webinar aims to address the challenges and hurdles women faces at the time of motherhood both personally and at workplace. We have also covered basic Maternity, Paternity and payment entitlements policies which sets out an employee’s basic contractual rights helping in creating a family friendly culture within the workplace.

Recorded Webinar: How HR and recruitment process can support business growth

Join our webinar with our recruitment company partner, Redimeer Recruitment, who work with start-up clients from start to finish, to find them the best matched talent for their clients and have hands-on experience in assisting companies in their recruitment journey. The webinar aims to address the challenges and hurdles you may face in recruitment, the legal considerations of recruitment and provide some practical guidance about recruitment processes and how to enhance them.

Recorded Webinar | ESG: Climate action, for any business

Join our webinar with our strategic partner Seedling discussing on what an Environmental, Social and Governance (ESG) is, what its benefits are, and how can your business become a certified Carbon Neutral business to attract investors. You’ll gain a comprehensive, detailed, and future-proof strategy for dealing with ESG risks.

Recorded Webinar: How to Prepare for a Fundraising Round

Funding rounds can be a long and complex process and it’s important that anyone seeking funding understands the various stages. This interactive webinar, designed for startups, founders and owner operators of small to medium sized enterprises who are preparing for a funding round or looking for investment.

Recorded Webinar: Cyber for Growth – Integrating Cyber into your Business Strategy and Legals

With a 77% increase in cyber-attacks on UK businesses in 2022, cyber needs to be a priority for firms of all sizes. Join the discussion and leave with actionable insights to help you define your cyber approach and how to leverage it for business growth.

Don't forget to share this post!

Startups & SME Advice, Tax Advice, UK Subsidiary, Accountancy Best PracticeAmelia Smith14 March 2023Dragon Argent LimitedBlog PostComment