When starting a new business venture, one of the first major decisions you will need to make is whether you start as a sole trader or register your venture as a limited company. Ultimately there is no right or wrong answer as to which is the best option – it will depend on your own circumstances, expectations and preferences.
There are, however, a number of advantages and disadvantages to both options which should be carefully considered before making your choice.
The amount of risk you are exposing yourself to is probably one of your biggest considerations. No new business is completely risk-free but you do need to ensure that all risks are carefully considered to ensure that they are kept to a minimum.
In this respect a sole trader can benefit from reduced startup and running costs as they can begin trading immediately without need to register a company, engage an accountant, or prepare any legal documents. This is in comparison to a limited company that would need registering with Companies House and a series of annual documents preparing each year. Although the cost of this is minimal, it does represent an additional financial risk for the entrepreneur.
On the other hand, a limited company by its nature helps to protect the owner from any personal liability. This means that if the company gets in to trouble in the way of debts or legal action, only the company can be held responsible and not the individual who owns it. This is in comparison to a sole trader who is personally responsible for all debts and/or potential legal cases, meaning a sole trader risks their home, personal savings and other assets when running their company.
Like it or loathe it, tax is something that will need paying whether you are a sole trader or a limited company, however, depending on which option you go for, there are different advantages and disadvantages when it comes to tax and the records you must keep for the tax man.
A sole trader for example gets to keep all of the profits they make and only pay personal tax on that income. A limited company on the other hand will be subject to corporation tax on profits made by the company as well as personal tax on any income derived from the company by its shareholders.
However, a limited company does offer the shareholders a chance to control how much tax they pay as money can be withdrawn as a dividend rather than a wage resulting in less personal tax needing to be paid. There are also a number of other tax breaks and initiatives available to limited companies that are not available to sole traders.
Generally most businesses will be better off in terms of taxation when operating as a limited company. However, if you prefer to keep things as simple as possible, a sole trader is by far the most straightforward when it comes to dealing with tax.
No matter which area your new business operates in, you will need to pay careful attention to the brand you portray whether you choose to be a sole trader or decide to set up a limited company. Your brand will not only directly affect the amount of income you are able to generate but it will also affect the satisfaction of your customers and clients.
A sole trader can present themselves as ‘one of the people’, a local friendly face who can provide a personalised and dedicated service. In some industries this is very important as people prefer dealing with an individual rather than a company such as tradesmen where being a ‘one man band’ can be seen as an advantage.
Conversely a limited company can more easily present a more professional image and give the impression of a larger, more successful, operation. This can be important when operating a business that is providing products or services to other business or when selling products to the end consumer when people will take a limited company more seriously than a sole trader.
Every business needs a starting capital to get off the ground and some require additional investments later down the line in order to progress and grow the venture further.
With this in mind a limited company is often seen as more favourable since limited companies have many more external finance options and programmes available to them whereas sole traders can struggle to be taken seriously to secure the investment they need.
However, there are advantages to being a sole trader when it comes to finance as it usually means you have no-one else to answer to and therefore can make quick decisions without the need for consulting others. On the other hand a limited company may be obliged to consult other invested parties before a major decision can be made leading to slower response times.
These are some of the most important factors to consider when making your choice, however, it is by no means an exhaustive list so you will need to think about your exact position and where you want to go very carefully. Deciding between being a sole trader or a limited company is not always easy, but it is a decision that must be made for every new venture.
Ultimately, whilst this is an important decision to make, it is also important not to let the decision become a barrier to getting started with your venture. Even if further down the line you decide you made the wrong choice – it’s not the end of the world. A sole trader can easily become a limited company (or vice versa) at any time. Sure, it may incur some small additional costs and paperwork to change your decision but it can be done. The most important thing is to simply make the decision, whatever it may be, so you can concentrate on making your business a success.
If you decide to go ahead and start trading as a sole trader then we wish you the best of luck and hope that you make use of the other articles we offer on this website to get you started.
If you decide that a limited company is the best choice for you then your first step will be to register your company at Companies House and secure your company name. If you make use of an online company formation agent this is a relatively simple procedure. All you will need are a few details about the company you wish to setup and the directors and shareholders who will be involved in it.
A Summary of the Key Considerations for Sole Trader Vs Limited Company
|Risk||Lower startup costs||Individual can be held responsible||Reduced liability||More annual filing requirements|
|Taxation||Only simple records need to be kept||No control – tax must be paid on all profits||Greater control over how much tax is paid||Corporation tax will be payable on profits|
|Branding||More personalised and friendly||Can appear too small to larger businesses||Looks more professional and successful||Can lack the personal touch|
|Finance||Only one decision maker and so progress can be quicker||Can struggle to attract external investment||External finance is more accessible||Other directors may need to be consulted on major decisions|