Trading as a limited company versus a sole trader is a decision that many businesses face in the UK. Understanding the differences between these two business structures is important in order to make an informed choice.

Limited company

A limited company is a separate legal entity from its owners and can enter into contracts, sue or be sued in its own right. This means that the owners (known as shareholders) are protected from personal liability for the company’s debts. Limited companies also tend to be seen as more credible by customers and suppliers, which can help to win business.

Sole trader

A sole trader is a single person who is responsible for all aspects of the business. They have complete control over the business and keep all of the profits. As a sole trader, you are personally liable for any debts the business incurs, which means your personal assets, such as your home, can be used to pay off these debts if necessary.

Taxation

Limited companies are taxed differently to sole traders. Companies pay corporation tax on their profits, while sole traders pay income tax on their business profits. In addition, limited company directors may also pay income tax and National Insurance contributions (NICs) on their salaries.

Accounts

Limited companies must prepare annual financial statements and file these with Companies House, while sole traders are only required to submit a Self Assessment tax return to HMRC. Limited companies also have more stringent reporting requirements and must appoint an auditor if they meet certain criteria.

Set-up costs

Setting up a limited company can be more expensive than setting up as a sole trader. Limited companies must pay for the formation of the company, as well as for registering for corporation tax and VAT (if applicable).

In conclusion, the choice between trading as a limited company or a sole trader will depend on the size and nature of your business, as well as your personal circumstances. Consider the factors discussed above and seek professional advice to help you make an informed decision.