If you own your own one-person business (also called ‘solopreneurs’ on the internet) you’ve probably asked yourself this question. Every business needs a legal structure. One-person businesses have the choice to register as a sole trader, partnership or limited company (ltd). Most choose either a limited company or sole trader. 

Many people start their journey as a sole trader and decide to form a limited company at a later date.

The difference between a sole trader and a limited company (in a nutshell)

If you are a sole trader, the business owner and business are tied together as one entity. You are a sole trader, your business is a sole trader business. 

In a limited company, the business is separate and distinct from the shareholders and directors. If you are the sole director, the sole shareholder and the sole employee, that is irrelevant to the overall company structure.

The difference between a sole trader and a limited company (the extended version)

Responsibility and risk

As a sole trader, you are responsible for any debts the business has, as well as your own personal debts. That means that if something goes wrong with the business, personal assets like your house or car could be at risk. 

On the other hand, the finances of a limited company are entirely separate from the shareholders or directors. That means you would only be responsible for the money that you put into the business.

Paperwork

Being a sole trader comes with a huge advantage. There is not a lot of paperwork. 

Limited companies, however, come with a host of reporting and management responsibilities. These include registering with Companies House, filing accounts and strict record-keeping. You must also follow PAYE (short for Pay As You Earn) procedures. Most limited companies hire accountants to prepare these documents for them.

Although Sole traders have to register with HMRC, they don’t need to register as a company with Companies House and they can start trading immediately.

Privacy

Sole traders aren’t publicly listed, while limited company details are posted publicly on companies’ house. 

Tax and money 

As a sole trader, you automatically retain all of your profits after paying taxes. If your business is a limited company, you must receive a salary or collect dividends. 

Sole traders and limited companies are taxed at different rates. Sole traders pay 20-45% income tax, compared to limited company owners that pay 19% corporation tax. 

Sole traders are taxed on the profits or losses of the sole trade, regardless of what they physically took out of their business bank account. 

Funding is more accessible to limited companies. Finance companies and lenders prefer limited companies because limited companies have in-built legal protection and tax benefits.

Should you transition your business from sole trader to limited company?

Being a sole trader is a good option for many small business owners and self-employed people to start their businesses.  However, there may be a point when you decide it’s better to be a limited company. 

Here’s why you must consider making the switch:

• Your profits are higher, and you want to be more tax efficient
• You have assets to protect
• You want to seem more legitimate and professional to customers

It’s not an easy decision to make, so make sure to get professional advice before making your decision. Your accountant will discuss your options and advise you on the best course of action.

Need some advice? Call our expert team today.