Sole traders and private limited companies comprise the overwhelming majority of businesses in the UK. If you are planning to start a profit making business, it is highly likely that you should choose between these two company types. In this guide we will use the term limited company to mean a private limited company. Whilst there are a number of limited company types beyond private limited companies, the term limited company is regularly assumed to mean private.
Sole Traders’ assets are not protected
- As a sole trader you are the company. That means if the company hits financial difficulties or is sued, so are you
- Limited companies are incorporated as independent legal entities in law. This means they are not you, and if they hit financial difficulty or get sued, you are individually protected
Sole Traders are cheaper and easier to maintain
- There are fewer statutory requirements for sole traders to adhere to. Unlike Limited companies they do not have to file a confirmation statement or maintain a company register
- Accounting is generally easier and cheaper because sole traders accounts are dealt with by the personal tax return of the owner. Limited companies must submit more detailed accounts
- Assuming you have no debts, winding up a sole trader tends to be simpler than with a Limited company, and no information is held on the public register
Sole Traders can be less tax efficient
- Remember we said tax returns were easier? Well this comes at a price. Limited companies accounting is more expensive partially because they have more options when it comes to managing profits and dividends.
- Sole traders tend to become less tax efficient as profits grow
Sole Traders can be seen as less credible
- Like it or not, Limited companies tend to be viewed as more credible or reputable
- This can help when it comes to obtaining credit and winning contracts with larger businesses
Sole Traders can be harder to sell
- Sole traders are people as well as companies. It can be harder to quantify where the person stops and the business starts
- Often accounts, license and contracts name the individual sole trader so these can be hard to transfer
- Limited companies are entities in their own right so as long as you own the shares, you own the entity. This is easier to quantify
Sole Traders are more private
- Sole traders only disclose their private information including turnover and ownership to HRMC
- Limited company information is held on the public register indefinitely and is available to anybody.