Sole Trader vs Limited Company

If your business runs up any debt you are legally required to cover it, this may mean even selling personal assets.

By setting up a limited company your business becomes a separate legal entity. Therefore if the business does run up debts the business, rather than you personally, are responsible.

You can build a great reputation as a sole trader and many customers won’t know the legal ‘status’ of your business or, to be honest, care! They are there for your amazing products and service after all.

Having said that, some suppliers & clients may feel more secure dealing with a company that has gone through the formation process. Once you get larger and becoming more prominent it may be time to form a limited company.

Along with being financially liable for the business, raising funds may be more difficult. Options as a sole trader include; savings, friends & family lending, go fund me pages, and some banks will loan you money however you may be considered too ‘high risk’ and refused. But if your over-heads are low and your cash flow good this may not be a concern for you.

You will have more financial options open to you and be more likely to be approved for a loan from a bank or lending organisation. All the options of a sole trader will be available to you along with more official routes. If you need a premises to operate from, need to buy equipment or require some start-up cash to get you going forming a limited company will make it easier when applying for finance.

Increased privacy. Your personal details won’t be published on Companies House.

You will have to publish your name (as a director), the names of fellow directors and your business address on Companies House. You can limit the amount of information out there by registering with a secretarial business service eg business address but some details have to be made public.

Business name protection. As a sole trader you may be worried about others operating with a similar name to take advantage of your good reputation, advertising efforts and word of mouth promotion from customers. You can take out Business Name Protection here with NBR to stop this from happening.

No one can use the exact same business name as you, they legally won’t be able to form the company. However this doesn’t cover you in every situation, they could add an ‘s’ to the name or ‘solutions’ etc so their name ends up being very similar to yours. You can take out business name protection to stop this, find out more here.

Tax can be substantially higher for sole traders, especially when you’ve established the business and are pulling in a good amount of money. Sole traders can be charged between 20%-45% tax on their profits (minus allowable business expenses).

Tax for limited companies is lower and they are generally considered more ‘tax efficient’. They are required to pay only 19% on their total profits (minus allowable business expenses).

There is less paperwork to do as a sole trader. You will still want to have an accountant but in terms of legally required documentation there’s less than a limited business.

More paperwork to do with legal annual documentation having to be submitted. As with being a sole trader getting an accountant is a great idea, they will be able to help you with all the paperwork and requirements.

You can employee people as a sole trader. Make sure you have insurance and are set up correctly with a PAYE scheme and pensions with HRMC. This is were an accountant will come in handy.

As with a sole trader you need to set up a PAYE scheme with HRMC for any employees you have and take out the right insurance to cover them.

As a sole trader you are less likely to have to need different kinds of insurance but check out our ‘Sole Trader’ article where we outline the basic forms of insurance to consider.

As a limited company you may want to take out insurance. We have covered the basic forms of insurance in our ‘Limited Company’ article. One to particularly consider, as a limited company, is individual director insurance.