Limited Company or Sole Trader?
You’ve got a viable business idea and have decided to launch your enterprise. One of the first questions you’ll need to address is whether to be a sole trader or establish a limited company? This is important, as you need the correct legal structure to operate effectively and it can affect the tax you’ll pay and what you can pay yourself.
Here we look at the key differences:
According to the Department for Business, Energy & Industrial Strategy, at the start of 2022, the UK private sector business population comprised 3.1 million sole traders (56% of the total). As a sole trader, you are basically a self-employed person who owns their own business.
Legally, there is no separation between the owner of the business and the business itself. As the business owner, you can keep the profits (after tax) but you are personally responsible for any losses the business makes, leaving your own assets at risk if things go wrong.
It is a fairly simple process to set up as a sole trader – all you need is a National Insurance number and to register with the HMRC for self-assessment (if you earn more than £1000 from the business). There is no requirement to have a name for your business, although most people create one.
As a sole trader, you will pay tax on your business profits, after submitting a self-assessment tax return. While most sole traders keep a track of their expenses and income, they are not legally required to complete and file annual accounts.
According to Companies House, there are more than 4 million limited companies registered in the UK, and over 500,000 new companies are incorporated each year. If you decide to set up a limited company, you will be a director of the business (which could be just yourself, or you might have employees).
As a director, you’re legally responsible for the decisions the business makes, but the business’ assets and liabilities are separate from your individual finances. Profits and losses thus belong to the company and you act not for yourself but on behalf of the company.
Setting up a limited company is more complicated than becoming a sole trader. You need to be at least 16 years old and not be prohibited by a court order from being a company director and have no history of bankruptcy.
As a limited company, you will need a company name and this needs to be unique. This will need to be registered with Companies House, after which it will be protected by law. You will also be liable for Corporation Tax.
Tax will be deducted from directors’ salaries via PAYE and, as a director, you will be expected to complete your own tax return.
You will need to prepare annual accounts for the company, which are filed with HMRC as part of the company tax return, as well as being sent to Companies House (and shareholders, if you have any).
In addition to the practical and legal differences between a sole trader and a limited company, there is the question of credibility. Some associates and suppliers, for instance, won’t be concerned about the legal entity of your business, while others will look at a limited company as giving the impression of a more established organisation. In some sectors, it might be that certain agencies will not work with sole traders because of the legal protection a limited company provides.
At Lewis & Co we work with both sole traders and limited companies. We would encourage you to get in touch with us while you are setting up your new business to chat through which entity would work best for your particular circumstances. Call us on tel: 01892 513515.