Deciding between a Sole Trader and Limited company?

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Sole trader V’s Limited Company

When setting up your company and becoming self-employed, you will have to decide whether to be a soletrader (or partnership if there is more than one of you involved) or become a limited company.

The decision can be a difficult one but the choice depends upon:

  • The type of work you plan to do:

Becoming a limited company can give you status, protection and credibility. Sole trader status is suitable for small independent companies that do not have a big turnover, or that have few expensive assets.

  • What is the size of you company and forecast turnover?

The size of your company and forecast turnover – one argument for becoming a limited company is that you should be making a profit in excess of £30,000

  • What is the risk?

When first trading the business may be small and consequently there may be lower exposure to cost and risk, but as the business grows the trade naturally becomes larger and riskier. It is usually much better from a risk perspective to trade through a limited company. This is one of the main issues considered when deciding on the structure of a new company formation.

  • Prestige

An element of prestige is created by forming a limited company. The corporate identity often appears more professional, more established, and both consumers and creditors know that they are legally registered and regulated.

Limited company

A limited company must be registered with Companies House which is a legal requirement.

Establishing a Limited company requires more formalities to be observed. This includes the filing of memorandum and articles, keeping the company registrar up to date with changes, and filing an annual return.

Limited companies offer limited liability to the shareholders as the company is a separate legal identity from the owners. Therefore the shareholders normally have no personal liability beyond the amount paid for their shares.

Limited company Pros V Cons

Pros

  • An element of prestige is created by forming a limited company.
  • It is usually much easier and more likely to sell a limited company than a sole trade business.
  • Risk of debt normally stays with the limited company.

Cons

  • Formation also requires the company accounts to be open to public inspection.
  • A limited company will have to comply with formalities of company law, such as preparation of board minutes and shareholder resolutions. As well as dealing with the extra returns and administration relating to running a company.
  • All companies must file annual accounts with the company registrar. This involves additional costs because you need to use an accountant.

 

Sole trader

If you are operating as a sole trader you have almost complete control over how the business is run. You can make all the decisions without interference.

There is no legal distinction between the owner and the business. The individual holds all assets of the business and so acquires all benefits and risks of running the enterprise.

This means that the individual risks losing their personal assets if the business fails.

Sole trader Pros V Cons

Pros

Sole traders have fairly simple accounts and are required to submit an individual self assessment tax return annually.

There is no requirement to make information public.

The business can generally be run in the matter in which the proprietor/owner wishes.

Cons

All your personal assets are at risk if the business fails. Personal bankruptcy can occur.

About Sushma

Sushma is a director at Your Accounts Team and more than happy to answer any question you might have. View all posts by Sushma →

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