Each of them has their benefits and disadvantages depending on the situation, so we explain in detail.
Hopefully you had the chance to read our previous article on the types of legal structures for a company in the UK, but if you haven’t read it, a summary of the two most common ones is below.
Choosing to be a Sole Trader is generally the simplest structure. Also known as Self-Employed this is the most popular choice for start-ups, accounting for the largest number of businesses in the UK. Income tax for Sole Traders means profits over £50,271 are taxed at 40% and profits over £150,000 at 45%. Sole Traders pay personal income tax.
A Limited Company is created when you incorporate your business and create a separate legal entity which reduces personal financial risk. If something goes wrong, you are only responsible for your share in the business. A Limited Company involves more administration but can provide greater stability in the long run. Corporation tax for Limited Companies is currently 19% on profits and Limited Companies pay corporation tax, rather than personal income tax on profits.
What are the Pros and Cons of being a Sole Trader?
A Sole Trader’s business is owned and controlled by one person who has unlimited personal liability for the business, and it is easy to set up with little paperwork apart from the Self-Assessment annual tax return. Sole Traders have more privacy as owner’s details cannot be found on public records (such as Companies House). It can though and trickier to raise finance as sometimes traditional lenders prefer the profile of a limited company. The personal liability of the business owners is also something to think through.
What are the Pros and Cons of a Limited Company?
A Limited Company’s ownership and liabilities are split amongst the registered legal members. Personal assets aren’t exposed and you only risk what you put into the company. Once a limited company’s name is registered, nobody else can use it. A Limited Company offers more flexibility in terms of remuneration of directors and allows for more options for tax planning. Disadvantages include more responsibilities such as the director’s fiduciary duties (outlining what the director must do legally). This comes, as expected, with greater admin.
Your accountant should be able to help you with setting up a structure that makes sense for you and explain all the implications.