When setting up a business, one of the most important decision is the legal structure: Limited Company Vs Sole Trader.
In this blog you can read about the main differences between the two structures, together with the advantages and disadvantages for each.
What Is A Limited Company
A limited company is a type of business structure with a separate legal identity from its owners (shareholders) and its managers (directors).
Advantages
- More tax efficient: A limited company offers some tax advantages compared to sole traders, such as lower tax rates for dividends and R&D credits.
- Limited liability: Unlike the sole trader structure, a limited company is a legal ‘person’ in its own right therefore the shareholders’ personal assets are typically safeguarded, mitigating personal financial risk.
- Better perceived: A limited company is better perceived from most suppliers and clients and therefore offers an enhanced creditability and sense of professionalism.
Disadvantages
- More Financial Admin: Setting up and running a limited company includes more financial admin and compliance requirements.
- More expensive: Running a limited company is more expensive due to the increased financial admin.
- Reduced privacy: A limited company must file certain documents to the public registry (Companies House), including your registered office address and certain financial information.
- Decision making: Being the director of a limited company entails a different decision-making dynamic compared to being a sole trader. Any planning or strategic moves necessitate consultation with all co-owners of your limited company.
What Is A Sole Trader
A sole trader is the simplest business structure, an individual who is the sole owner of a business.
Advantages
- Easy to set up and limited admin tasks.
- Greater privacy as there is no need to file any reports to the public registry.
- You make the decisions: as a sole trader you have decision-making freedom and full control over the business.
Disadvantages
- Full responsibility of the business: as a sole trader you have unlimited liability for the business liabilities, as you are not viewed as a separate entity by UK law.
- Raising finance can be tricky: as a sole trader, it’s much more challenging to get a bank loan compared to a limited company.
