Sole trader vs Limited Company - what’s the right structure for your business?

Sole trader

As a sole trader, you run your business as an individual. There is no legal distinction between you and the business. You own everything from business assets, to profits and liabilities. You also have full control and can run your business without interference. Any profits the business makes after tax and National Insurance are yours. Similarly, you will be held liable personally for any debts that arise from the business to the extent of your personal assets.

Setting up as a sole trader is relatively simple and there is far less paperwork and admin, compared to setting up a company. However, this may leave you at a disadvantage when it comes to either accessing business finance, benefitting from tax reliefs or even considering the succession of your business. 

One further point to consider is that a significant number of new businesses make losses in their first years of trading. In a company these losses are carried forward against future profits. However, for sole traders it may be possible to carry the losses back to set against the income of earlier years. If cash flow is a deciding factor, this could be a valuable relief.

Limited Company

If you’re thinking of setting up a company, you’ll need to choose a company name and register the company with Companies House before you start trading. As a Director of a Limited Company, you’ll have a number of statutory and legal responsibilities, including filing annual returns with Companies House and notifying them of any changes in officers, registered office and share allocations. You’re also bound by the general duties of a Director, as defined by the Companies Act 2006. It’s worth bearing in mind that there are likely to be additional compliance costs for dealing with both Companies House filings and for dealing with HMRC.

A company is a completely separate legal entity and you therefore have limited liability by trading through a company. This ensures that your personal assets are kept separate from the company’s assets and you should be protected if things go wrong.

A limited company will pay tax on profits (currently at 19%). To withdraw money from the company you can either draw a salary/dividends, which will be taxed on you personally. There is flexibility for tax planning as dividends can be delayed until a later tax year in order to use your allowances and rate bands in the most tax efficient way.

A company can offer you more flexibility by either bringing in outside investors through share purchases or subscriptions, or for tax planning within the family, whether by employing family members or issuing them with different classes of shares. Also, the use of a company may help to present a more professional image for your business and, when it comes time to sell the whole or part of your business, the process is likely to appear cleaner and more attractive to an investor than an unincorporated business.

Summary

The decision to operate your business as a sole trader or through a Limited Company is not necessarily as straightforward as it may appear at first glance. The Limited Company route offers limited liability for its members and can be more tax efficient, but it does come with a heavier burden of administration. The sole trader option is a simpler process and may provide more flexibility, but you may have little or no protection if things go wrong. It’s important to consider all of the implications and we would urge you to seek professional advice on the structure before you choose.