Sole Trader vs Limited Company – A short Simple Guide

Are you setting up a business and having the “sole trader vs limited company” mind battle? Then here is a short, simple guide to help you get it right.

What is a Sole Trader?small trader vs limited company

A Sole trader is any person who starts a business whether it is under their own name or a purely business name.

So you could be John Blogs Motors or Excelsior Motors. All you have to do is inform HMRC ( the tax man) that you are now self employed and away you go.

This can also apply to partnerships although more care is required with the legal aspects of this type of business.

If it’s this simple why do people bother with Limited Companies.

What is a Limited Company

A limited Company is formed to protect the owners from certain liabilities and to gain some advantages.

You can set up a Limited Company quite easily and cheaply. Your accountant can probably do it for around £30.00 by obtaining a company that has ceased to trade and changing it’s name.

This is exactly how I did it.

Many people are attracted to the Ltd status expecting that the company that is an entity in itself  will not make them liable personally liable for anything.

This is the idea of limited liability but it is only partly true.

The Biggest Misconception

I’ve got to mention this one.

If you borrow money as a Ltd Company and you loose it a lot of people think that it’s the companies problem and that your personal finances are safe.

From my own experience I can tell you that until your Limited business has acquired assets ( buildings, equipment etc) and become established the banks will need you to Guarantee any loan that they consider making to your business.

And that means your house is at risk if you fail to repay.

This is an important point and reduces the benefit of being limited in the early years.

Sole Trader vs Limited Company

To make this easier I will list the pros and cons for each, putting sole trader first and then Ltd company second.

Much of this will overlap but the emphasis is different.

OK so the major differences are:

  • Sole Trader is easier to set up and only requires a minimum of one person. A Ltd company is slightly harder to form and must consist of a director and a company secretary ( often the directors wife).
  • A sole trader can produce the accounts on his annual self assessment tax return. A Ltd Co must have audited accounts prepared by a chartered accountant this will cost £ 400 to £1,000 depending on the complexity.
  • A Ltd Company must be registered with companies house and the annual accounts must be sent to them at the required time. There are also small payments to be made
  • A sole trader pays income tax on his profits, whereas, a Ltd company pays a wage or dividends to it’s employees. Any remaining profit is liable to corporation tax currently at 20%.
  • A sole trader must pay Class 2 National Insurance payments ( currently £2.80 per week – 2016/17) plus class 4 contributions calculated by HMRC on the profit. On the other hand the Ltd Co pays PAYE which includes employees NI, and employees tax both of which are deducted form the employee’s salary In addition Ltd Companies must pay employers NI.
  • Any claim made against a sole trader ( if not met by insurance) can be claimed from personal finances. A Ltd Co, being an entity in it’s own right, limits any such claim to the finances of the company not any individual within it.
  • If a sole trader has a business name it is unprotected. Anyone else may start using the same name or may be found to have been using it, unknown, for some time. This can cause a costly name change requiring changes to all literature and stationery, websites etc involved. A Ltd Co registers it’s name with companies house and this situation can not happen to them.

WOW That’s a Lot

I must admit that here is quite a lot involved and if you have any complex situations around your business startup or intended startup it would be sound advice to speak to you accountant or solicitor.

This would be definitely be the case where partners are contribution differing amounts and the exact share of the business allotted to each is involved.

Another complication would be the presence of intellectual rights or patents.

My Personal Take on it

Start your business as a sole trader. It is far simpler and you can always change later on if it becomes advantageous to do so. Changing from a Ltd Company to a sole trader is not such a simple matter.

One big consideration which did not come up in the list of pros and cons is where you have customer expectations.

When I started my first business I was selling Business to Business services mainly to large corporations, companies, and Local Government who all expected to be doing business with a Ltd Company.

It was for this reason that I elected to set up a Ltd Company from the start and the same logic led me to be VAT registered before I even had my first order.

It was expected of my business and who was I to disagree.

I hope that you can find the answer to your dilemma here, if not then why not use the “comment” facility at the bottom of this page to ask a question.

Even if I can’t answer it other readers may well do so.

Good luck with your business – what ever form you decide it should take.

Sole Trader or Limited company signiture





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