Getting Started – Sole Trader or Limited Company?

By Jake Martin

2 min read

Once upon a time, most people starting out in business would register as a sole trader and away they went. Today, it’s easier than ever to register a limited company, so which is right for you? There are benefits to each, so let’s explore the fundamental differences.

Ownership Structure

As a sole trader you are the business. Although it’s prudent to manage certain things separately, such as a bank account, you as a sole trader are entirely responsible for the business: it’ll cease operating when you choose and you alone are accountable for any debts.

Limited companies, on the other hand, are more detached from you personally. You are a director, shareholder and employee of the business but the business is not you. Any assets and debts belong to the company. The business cannot simply be terminated when you choose; it must be formally wound up or struck off by Companies House.

Setting Up

Setting up as a sole trader is fairly straightforward. You can register online through the HMRC website and will be required to advise them of the nature of the business.

As a limited company director you’ll be expected to register with both HMRC and Companies House, and that process is a little more involved.

Annual Reporting

There are also some important differences in what information you’ll be required to provide for the authorities. Sole traders and directors of limited companies are both required to complete annual tax returns based on any income and expenditure in that tax year. The forms are intended to be simple to fill out and are all available online.

As a limited company, though, you’ll also be required to complete and file audited accounts on an annual basis. In addition to indicating the financial health of the business, they also show how much money is owed in corporation tax. Crucially, these accounts must be produced by a professionally qualified accountant who will require access to thorough financial records. A software platform such as Quickbooks can make keeping such records as simple as possible.

Paying Tax

As a sole trader your tax payments are based on your profits after you subtract any costs. Tax is paid in line with the government set income tax bands. You’ll also need to make either Class 2 or Class 4 National Insurance contributions, depending on your total profits.

As a limited company your business is liable for tax on business profits, with the tax rate at 20% on profits up to £300,000 from April 2015. As the director of a limited company your tax position may benefit from a smaller salary and high dividend payments from profits after tax, which would not be subject to National Insurance.

Liabilities

Finally, as we mentioned at the outset, the difference in structure also impacts responsibility for any outstanding business liabilities. In the case of a sole trader, all debts of the business belong to the individual. Limited companies, on the other hand, hold any debts themselves, as opposed to the shareholders. Owners are therefore insulated from being held personally responsible for debts in the case of insolvency.

Overall, operating as a sole trader entails a simpler administrative process but carries with it the additional risk of being individually responsible for any debts. Limited companies remove that responsibility, but add a number of regulatory requirements that you’ll need to be aware of. The choice is then which suits you best.

For more help getting started with your new business venture, visit the Quickbooks Starting Up portal.

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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