What's the difference between a Sole Trader and a Limited Company in the UK?

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Should you set yourself up as a Limited Company or a Sole Trader? This is often one of the biggest questions in the mind of a person who wants to start their own business. But what distinguishes a Limited Company from a Sole Proprietor? Read through the definitions below, weigh up the benefits and drawbacks, and decide which legal structure is most appropriate for your business. No matter how big or small, every business requires a legal framework. 

You can opt to operate as a sole proprietor, a partnership, or a limited company, though a sole proprietor or a limited company are the two most businesses choose to adopt to trade through.

What is a "Sole trader"?

In the eyes of HMRC a Sole Trader is a self-employed individual who is a UK resident and who runs their own business and works for themselves.  One can work alone or can also hire others to work for them as a sole trader. A Sole Trader is fully and personally liable for the business’s debts and obligations. There is no legal separation between their business and themselves. A Sole Trader must sign up for self-assessment, file an annual self-assessment tax return dealing with their income and outgoings, and pay income tax and national insurance contributions(NIC) on any or all taxable income. A sole proprietorship is quite prevalent for business structures in the UK.

How to become a sole trader?

There are no huge obstacles in setting yourself up as a Sole Trader. You must first inform HMRC that you are self-employed. After that, you simply have to sign up for self-assessment as a sole proprietor via the HMRC website. When registering with HMRC you will need to have a business name available. 

After that assuming that you have industry-specific permits in place, you should be set to go.

What are the advantages and disadvantages of working as a sole trader?

Advantages:

  • ●Few minutes of online registration.
  • ●No need to register at Companies House.
  • ●No fees for registering the business.
  • ●Fewer reporting, accounting, and bookkeeping requirements.
  • ●Complete control of ownership.
  • ●All profits after the taxes belong to the sole proprietor.
  • ●None of the solitary proprietor's personal or business information is made public.

Disadvantages:

  • ●Possible problems with credibility.
  • ●The sole proprietor alone is accountable for all actions.
  • ●Fewer chances for tax planning.
  • ●Tax efficient but not as much as a limited company.
  • ●Meeting the requirements for statutory sick pay is not practical.
  • ●Sole proprietorships have a reputation for being smaller or less stable.
  • ●Capital raising may be more difficult.

What is a "Limited company"?

An organisation structure that is officially in incorporation with Companies House is a limited company. It is a separate legal entity from its owners and is in charge of its money and debts. One or more directors oversee corporations. Directors are opted by members to manage the company on their behalf. But it’s typical for them to be members of the company. Reduced financial liability for commercial debts benefits limited company owners. It’s known to be a limited liability. 

The Companies Act of 2006 mandates that businesses pay corporation tax on all taxable profits, file annual tax returns and adhere to several structural fillings and reporting obligations. Although managing a limited company requires more work, it is a very advantageous and tax-efficient form for many firms.

How to set up a limited company?

No doubt, starting a limited business requires more paperwork than setting up as a sole trader. Fortunately, we can guide you through the procedure in a straightforward, efficient and affordable manner. Icon Offices can form UK Limited Companies and register them with Companies House in approximately 1 working day. We can offer this great fast service from a cheap one time fee of only £5.99 

What are the advantages and disadvantages of working through a limited company?

Advantages:

  • ●An independent, autonomous, and unrelated legal entity from its owners and provides limited liability.
  • ●They enjoy better prestige and professional reputation.
  • ●Even if in control of just one person, they have a reputation of a large and more established business that may appear to a broader spectrum of potential customers.
  • ●It is frequently simpler to raise money from letters and investments.
  • ●When a business operates as a corporation, it may be simpler to grow it.
  • ●They enjoy permanent existence, which implies they continue to exist even after the original owners have left them.
  • ●On all taxable income, they pay corporation tax.
  • ●Directors can frequently pay themselves in a variety of more tax-efficient ways.

Disadvantages:

  • ●The company must be in incorporation with Companies House.
  • ●Must register for corporation tax with HMRC.
  • ●Sometimes the cost of set-up and operations is higher.
  • ●There are limitations when deciding on a company name.
  • ●If one has a pending bankruptcy or is an ineligible director, they cannot form a limited company.
  • ●Must keep registered office address in the same region of the UK as the company’s incorporation.
  • ●A service address must be precise for directors, subscribers, and people with significant control(PSCs).


What are the differences between a sole traderand a limited company?

 

Basis

Sole trader

Limited Company

Liability

Unlimited

Limited

Registration

HMRC

Companies House

Tax- efficient

Less tax efficient

More tax efficient

Company Accounts

No requirement to maintain

Need to maintain

Cost of set up

Free

Of charge

Profit

Belongs to owner

Belongs to shareholders

Credibility

Less credible

More credible

Personal information

Made public

Kept private

Paperwork

Less paperwork

More paperwork


a. Will I earn more money as a limited company or sole trader?

If your profits exceed £25,000 annually, opening a  Limited Company may be advantageous. This is because Corporation Tax for Ltd Companies is only 19%. Lower than income tax in the UK which is higher and dependent on how much an individual earns in total in a year.

b. Is a sole trader mortgage easier to get than a limited company mortgage or loan?

As the sole trader, you are the boss of the business, and all the profits are yours. So it is easier to prove your income to the bank.

But as a limited company, all the profits are of the company. It might get trickier to prove your income to the bank.

c. What rate of tax do I pay as a sole trader compared to that of a limited company?

Sole proprietors pay 20 to 45% of income tax, but limited companies pay only 19% Corporation Tax on profits.

d. How do I decide how much to pay myself and how much to leave in the business?

Decide your salary on the basis of net business income after keeping 30% for taxes. Then you divide the remaining as business savings and salary.

e. Do I have to be registered for VAT to be a limited company?

A limited company may or may not choose to apply for VAT if it is below the annual threshold. 

f. What happens if I change my mind and decide I don’t want to be a limited company after all?

You will need to submit a form for removal from the register of companies at companies house.

g. Sole trader or limited company?

It depends on what suits you the most. You should weigh the pros and cons and then make a final decision.

Conclusion

Deciding to choose a suitable legal structure for your business is a trickier question to answer. There are benefits to a limited company, but it is not a cup of tea for everyone. One needs to consider their plans while making the decision.

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