One of the biggest decisions when setting up a business is choosing the legal structure. 

No matter how big or small, every business must have a legal structure, with the bulk choosing to be either a sole trader or a limited company.

So what is the difference between the two and which could be the best fit for your business?

WHAT IS A SOLE TRADER

A sole trader is essentially a self-employed person who is the sole owner of their business. It is the simplest business structure out there, which is probably why it’s the most popular. You can set up as one via the GOV.UK website (you’ll need to do this for tax purposes)

The business and the person are not separate entities, and as a sole trader, you’re personally responsible for any losses the business makes. Likewise, you keep all of the profits after you’ve paid tax on them. Sole traders are personally responsible for keeping records of business sales, spending and financial affairs. This includes sending a Self Assessment tax return every year and registering for VAT if and when your takings are over the VAT threshold. 

WHAT IS A LIMITED COMPANY

A limited company is a type of business structure with its own legal identity, separate from its owners (shareholders) and its managers (directors). This remains the case even if it’s run by just one person, acting as shareholder and director. The company’s assets and liabilities are completely separate from your personal finances.

If you decide to set up your own limited company, you’ll be a director and a shareholder of the business. You can be paid a salary and/or dividends from the company’s available profits. All limited companies in the UK need to be registered with Companies House to file annual returns with statutory bodies such as Companies House and HMRC. It’s your responsibility as a director of the company to ensure this happens. There are some other deadlines and responsibilities.

PROS & CONS OF SOLE TRADER & LIMITED COMPANY

Sole Trader Advantages

• Being a sole trader means more control for you. You run your business the way you want, without interference from anyone else.
• Easy to set up and relatively little paperwork, other than an annual self-assessment tax return.
• This also means that all the after-tax profits you make are yours. Sole traders don’t have shareholders to pay or split profits with so if you work alone, you have the ability to maximise your potential profit and ensure costs are low. 
• Becoming a sole trader has the ease of a simple set up. In essence, you only need to let HMRC know you are now self-employed by registering for self-assessment as a sole trader and choose your business name. And you’re done. Apart from any industry-specific licenses, you may have to obtain; you can start trading instantly.
• There isn’t much paperwork to fill out, but there is also less admin overall. As a sole trader, you will need to keep accurate records of your expenses and sales, but you will only need to submit a self-assessment return. If your turnover is above the £85,000 threshold, you may have to register for VAT.
• You don’t have to publish details of your business on Companies House, and you are granted privacy by HMRC’s taxpayer confidentiality rules. Your private information and business details won’t be visible to anyone, so your competitors won’t gather information about you.
• If you change your mind and don’t wish to continue working as a sole trader, you have the option to incorporate your business if you so wish. 

Sole Trader Disadvantages

• The biggest disadvantage of this type of business structure is that you’re responsible for your business’ debts. You are legally responsible for all elements of your business and have what is called ‘unlimited liability’; this means your personal assets could be at risk.
• In certain sectors, potential clients can sometimes prefer to deal with limited companies rather than sole traders.
• Sometimes, sole traders can be seen as less professional than limited companies, making some clients less likely to work with them. For this reason, you may find it difficult to get larger jobs. This is more common if you’re trying to work with big corporations,
• Operating as a sole trader, you’ll more than likely end up paying more tax than an equivalent limited company.
• Sole traders have the same tax status as individuals, with a tax-free personal allowance of £12,500 for the 2019/2020 period. You start paying tax on income above this figure, which stands at 20% between £12,500 and £37,500, 40% for income between £37,501 and £150,000 and 45% for anything above £150,000. National Insurance Contributions may also be due.
• As a sole trader, you’re also running the day-to-day of your business all by yourself, since everything is your responsibility, so it can be difficult to take a break or a holiday. This also means that your business will stop if you cannot work. Due to sickness, injury, or any other reason, it’s important to consider whether this is the right business structure for you if there’s a risk of income loss unable to work.
• Having full control is certainly an advantage, but it can also be a downside, depending on how you see it. All business decisions have to be made by you, which means your business’s success or failure hangs solely on you as well. For some, this can be incredibly stressful, especially if there are outstanding debts to consider or crucial strategic decisions that impact your business.
• Sole traders cannot offer shares in their business, and it can be more challenging to raise much-needed capital. Should you choose this structure but know that you’ll need financing, you will likely have to turn to financial organisations like banks, for example.

Limited Company Disadvantages

• There are added responsibilities as a limited company. These come in the form of the Director’s Responsibilities, which outline what a limited company director must do legally. You’ll need to file a yearly annual return for one and annual accounts.
• The added responsibilities going limited can be costly and time-consuming, as you will need to either deal with this extra paperwork yourself or hire an accountant to handle it. You will need to pay a fee to incorporate too.
• Your business can be found via Companies House, details on directors and your company’s earnings required to be shown publicly. This sort of transparency may not appeal to all.
• As you are your limited company’s business owner, you will be in charge of all the administrative duties that come with running your own business. Limited company ownership means that you must keep accounting records which may include:

–      Details of any incomings and outgoings

–      Assets owned by the business

–      All goods that have been purchased and sold

–      Information on any debts the company may have

• Any key business decisions will have to be agreed by all shareholders.

Choosing the right legal structure is big and can be a hard decision. Feel free to give me a call if you would like to discuss the options further.