Should I be a Sole Trader or Set Up a Limited Company?

Posted by on Feb 1, 2018 in News Alerts, Newsletters | No Comments

This question, if you should be a Sole Trader or set up a Limited Company is a frequent query that we get asked. The answer is dependent upon your individual circumstances, but there are advantages and disadvantages of both that can help you make your decision.

This newsletter will take you through these to aid you with your decision making.

Advantages of being a Limited Company

A Limited Company offers the individual protection by limiting their liability as the Company is a separate legal identity from the owners. Any loan or credit agreements would be in the name of the Company offering a degree of safety to the individual. Therefore, the shareholders normally have no personal liability beyond the amount paid for their shares.

A Limited Company often appears more professional, more established, and both consumers and creditors know that it is legally registered and regulated. Therefore, there is a perception that a Limited Company is more trustworthy than a Sole Trader which may assist in winning new business.

Additionally, it is usually much easier and more likely to sell a Limited Company than a Sole trade business. For a Limited Company there is also an opportunity to raise funds by issuing shares.

Disadvantages of being a Limited Company

There are statutory requirements in and around operating a Limited Company that inevitably means paperwork. Therefore, administrative expenses will be higher than a Sole Trader to ensure compliance 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.  Due to this, professional accountancy services are normally required to assist with the preparation and filing of accounts and tax returns.

A Limited Company provides less privacy than a Sole Trader. Certain business information must be filed at Companies House and as a result they are available for inspection by members of the public, for example the Company’s Annual Accounts.

Advantages of being a Sole Trader

Sole Traders have fairly simple accounts and are required to submit an individual self-assessment tax return annually, possibly along with any other VAT and payroll returns depending on their circumstances.

Professional accountancy advice is normally required to prepare business accounts, tax returns and administration around VAT and payroll. However, there is less complexity compared to Limited companies, which can result in reduced administration costs.

Finally, there is no requirements to make information public and the business can generally be run in the matter in which the proprietor/owner wishes.

Disadvantages of being a Sole Trader

As a Sole Trader, the individual is the business and has unlimited liability, as such, would be personally responsible for any loan or credit agreements. This means the owner’s personal assets are at 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. Hence, it is usually much better from a risk perspective to trade through a Limited Company. This is one of the main issues to be considered when deciding on the structure of a new Company formation.

Additionally, the credit rating of the owner can affect the business’ credit rating. Therefore, it can be hard to raise funds when trading as a Sole Trader. Additionally, the business may appear less established compared to a Limited Company. This in turn, may impact on the owner’s ability to sell the business. Potential acquirers often perceive unincorporated businesses to have a lower value when compared to a Limited Company. Therefore, when selling the business, you may receive less than if it was a Limited Company.

Tax burden to be Considered

In most cases, the tax burden is relatively high for a Sole Trader compared to trading as a Limited Company.

As a Sole Trader you pay 20% – 45% income tax on the taxable profit, whereas for a Limited Company you will be subject to Corporation tax of 19% on the taxable profit (2018). This will be reduced further to 17% in 2020.

Additionally, as a director of a Limited Company you are entitled to an amount of tax-free allowance for dividend per tax year. This amount is currently £5000.00 for the tax year 2017-2018. However, this is going to be reduced to £2000.00 from 2018-2019 tax year.

You are also able to reclaim quite a substantial proportion of the expenses you are likely to incur for the Company and these expenses are allowable against Corporation Tax.

If you would like to discuss your circumstances or have any questions, please contact to arrange an initial free consultation.