Ltd Company Vs Sole Trader

January 12, 2022/Dinah Jones

As soon as you decide to establish a business, you will need to determine whether or not to form a new limited company or go it alone. Self-employment might take the form of a single proprietorship or a partnership, depending on your preference. Many new businesses begin as sole traders and subsequently transition to limited companies.

It’s essential to know the pros and cons of each company structure to make an informed decision. This knowledge would allow you to maximise profit, minimise risk, and grow your business more effectively.

This article will discuss each company structure to help determine which one is best for you.

Ltd Company

A limited company is a company structure in which it has its legal existence, distinct from its shareholders and directors. Even though a corporation has just one shareholder and director, it is still a legal entity in its own right. Your company will have a different legal identity from yours, and its money will be maintained separately from your own. As a director of your limited company, you will be protected from personal accountability for the company’s debts and obligations.

Take John, for example, who is the only director and shareholder of Swift Communication Ltd. When the company makes a sale, the money belongs to the company. Swift communication Ltd may give John a salary as a director or pay him dividends as a shareholder if it makes enough money. And it can reimburse him for any personal business expenses he incurs. Aside from that, if he withdraws funds from the company’s bank account, he may be subject to further tax.

It is possible to form a private limited company for any business, including a plumber, hairdresser or photographer. Shareholders are the owners of a private limited company.

Advantages

If you ever choose to sell your company, you’ll have more options than you would with other business forms.

Nobody else can use your business name after you have registered it, unlike sole traders, who do not have the same protection (a sole trader, however, might register this as a trademark).

As a director of a limited company, you have the option of receiving a salary as well as dividends. It is possible to save a lot more money on taxes when you get dividends rather than salary since the tax threshold for dividends is lower.

If your company suffers losses or debts, all shareholders have limited accountability; it is not your duty. Your assets will not be at risk since you just have to lose the money invested.

Disadvantages

To run your company, you’ll need a separate business bank account.

You must register for a PAYE plan with HMRC to get a salary.

Sole Trader

A sole trader is a self-employed individual that runs their own business. Because a sole trader company lacks a legal status apart from its owner, many people believe you are the business. As a sole trader, you have complete control over your business, assets, and income after taxes. Along with this level of control, this business model provides relative simplicity, adaptability, and a variety of additional benefits. For example, although having a separate bank account for your company is a good idea, it is not a legal need. Business owners who offer specialised services, such as gardeners, carpenters, or builders, sometimes operate as sole traders.

Advantages

For the sole trader, HMRC registration is free.

The only documentation required is a self-assessment tax return every year.

Paying yourself does not need the establishment of a PAYE program.

In contrast to a private limited company, which has publicly available information, sole trading provides more anonymity.

As a sole proprietor, you are entitled to all of your company’s earnings.

Disadvantages

You are responsible for any losses your business incurs and may be forced to use your own money to cover any obligations, which might result in the loss of personal assets.

It is more difficult to get capital. Banks and other investors favour limited companies, which may restrict the company’s ability to expand.