Difference Between a Sole Trader and a Limited Company

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You may come up with a great business plan for your startup, but the first step you can ever take towards a successful business experience is learning the difference between a sole trader and a limited company. When starting a business, one of the first decisions is whether to operate as a sole trader or a limited company.

Every business, large or small, requires a legal structure. That structure depends a lot on the fact that the owner is a sole trader or the company is limited. Running a business as a limited company has many advantages, but it’s not for everyone. It’s easier to be a sole trader because you don’t have to deal with a lot of paperwork and accounting. But if you care more about saving taxes, protecting your assets, and having a professional image, company formation may be a better option.

You should also consider your long-term business goals, the sector you work in, the kind of customers you want to work with, and how much you are willing or able to spend on record-keeping and accounting (or hire an accountant to do it for you).

Here at BusinAssist, our team brings you the luxury of easy company formation in the UK, without having to invest a fortune in real estate for your small business. We are here to educate you on every step as you move forward with your business ideas in your chosen industry. Below is our helpful guide to teach you the difference between a sole trader and a limited company, so that you can make a wise decision.

Let’s Explain What is Sole Trader

A sole trader, also known as a sole proprietor, is the simplest and most common business structure adapted by most small businesses or startups worldwide. It is nothing but one person running their own business, with no legal distinction between the owner and the business itself. This means that one person is entirely responsible for everything going on in the business—from day-to-day operations to finances and taxation.

Advantages of being a sole trader

Low cost and easy setup:

As we explain what is sole trader, you will understand why it is such a popular business model. When you are the only person in the business, you do not need to do any big legal paperwork to start earning money. This makes it an ideal option for people with limited resources or those who just want to experiment how it feels to be a business owner.

Full control on decision-making:

When you are a sole trader, you have complete autonomy over your business decisions. Nobody can tell you what to do, how to set your prices, or how to run your business.

Keep all profits to yourself:

After paying income tax, the rest goes into your pocket! This is one of the best points in the difference between a sole trader and a limited company. You never need to share your profits with anyone if you’re the one funding the entire business.

Flexibility and quick adaptability:

Just because you are running everything yourself, you can quickly adjust to changing markets and customer demands. This is a secret ingredient to survive in competitive industries.

Privacy of finances:

The biggest difference between a sole trader and a limited company is the privacy of financial statements. Your financial statement is not publicly available, unlike that of limited companies.

Disadvantages of being a sole trader

Too much liability:

The key difference between a sole trader and a limited company is that the business of a sole trader is directly connected to his personal assets. This is the biggest drawback because, just like profits, you are responsible for the losses, even if they exceed your business assets. This means your personal assets, such as your home or savings, can be at risk if the business fails.

Almost no access to extra capital:

Another big problem is fundraising. If you are not registered as a company, nobody will give you loans, and you cannot issue shares to raise your capital. You may think about getting help from friends and family, but that’s limited to that only.

Huge administrative burden:

Although the setup is simple, you are responsible for all bookkeeping and tax compliance yourself. This can be time-consuming and complex, especially for those who are not familiar with financial matters.

Tackle the entire hiring and retaining process alone:

As a sole trader, you may struggle to attract and keep high-calibre employees in your business due to the limited opportunities for career growth and other benefits. Similarly, you have to waste some time recruiting people frequently, as they keep leaving within short terms.

Health will interrupt operations:

You are the only person running everything here. So, if you become incapable of managing the business due to illness or any other reason, the business may have to close down. This can be a huge risk for those who rely on their businesses for their livelihood.

Now Let’s Explain What is Limited Company

A limited company is a strategic business structure that operates as a separate legal entity from the personal finances of its members. This fundamental characteristic, often termed “limited liability,” shields members from undue financial responsibility for the company’s debts. The company is incorporated at Companies House, becoming an entity with its own legal standing.

Directors, appointed by members, manage the company, balancing the dual roles of leadership and membership. Limited companies are classified into two types: those limited by shares, in which ownership is distributed among shareholders, and those limited by guarantee, which are commonly used by non-profit organisations. The former targets profit-making enterprises, while the latter attracts organisations whose members do not seek a share of trading profits.

Advantages of a Limited Company

Separate legal entity apart from owner:

The biggest difference between a sole trader and a limited company is the legal entitlement. A limited company is always registered as a separate legal body with its own taxation and fund entitlements. A separate entity also means separate tax calculation and the company’s existence even if the owner is not actively working.

Full access to fund raising techniques:

With a limited company registration, any business can raise funds through bank loans, get prospects for investment as well as sell out shares to earn extra capital. This helps in increasing all growth opportunities for a company.

Tax efficiency:

Tax efficiency is a notable advantage for limited companies. They pay Corporation Tax on taxable income, and directors can choose how to pay themselves with a combination of salary and dividends.

Limited liability:

If your business is a limited company, you don’t have to worry about paying off the losses from your own pocket. So, the personal finances and assets of members are protected, no matter what they agree to invest in or guarantee to the business.

Disadvantages of a Limited Company

Too much legal paperwork:

To become a limited company, it must be incorporated at Companies House and registered with HMRC for Corporation Tax. Managing the accounting and filing requirements of a business entity takes more time and effort than managing those of a sole proprietorship. So, you will absolutely need a professional accountant for this. Even if this sounds hectic, these should not be treated as drawbacks, as they pay off in the long run.

Too many restrictions:

A long list of restrictions would probably be the biggest difference between a sole trader and a limited company. Choosing a company name has some limitations. You cannot set up a limited company if you are bankrupt or a banned director. Your company must have a registered office address in the same UK region where it was formed. You also need a service address for directors, subscribers, and PSCs. Taking money out of a company is not easy—you need to have enough profit after taxes and expenses and follow the rules to pay yourself.

Company financial information made public:

Another huge disadvantage would be all the financial stats and info made available to the public. This is an important point in registration as a limited company. The information includes everything from the registered office address, service addresses, directors’ details, shareholders’ details, PSC details, filing history, and financial activities.

How to Register as a Limited Company?

Now, that you have learned the difference between a sole trader and a limited company, you must be wondering how to convert your business into one. It only takes a few working hours to convert from sole trader to limited company by sending an application online to Companies House.

At BusinAssist, we have a team of expert legal professionals who will help you in every step of this conversion. All you have to do is choose a company name and submit the following information on the application form as follows:

Company name
Registered office address
Director’s details (minimum 1)
Shareholders’ or guarantors’ details (minimum 1)
PSC information
Service address for each director, company secretary, subscriber, and PSC
SIC code(s)
Details of issued shares (if applicable)

If you’re confused about all the information and how to do it, don’t worry. Our company formation service is open to happily help you. If you choose us, you’ll get the following facilities.

Get your company formed within one working day by Companies House authorised formation agent – BusinAssist
Fill out a simple 2-minute application online
Choose between using your own address or ours as your registered office address
Opt for a Virtual Office address service with mail handling
Create your own unique virtual address for your company with the only Company Formation specialist in the UK that offers this option

FAQs

Q: Do I require business insurance as a sole trader or a limited company?
Ans: Business insurance is not a legal requirement for sole traders or limited companies, but protecting yourself and your business from potential risks may be advisable.

Q: How much tax efficient is it to operate as a limited company?
Ans: Operating as a limited company can be more tax efficient than being a sole trader, as you can pay yourself a salary and dividends and benefit from lower corporation tax rates.

Q: Does becoming a sole trader require me to register with Companies House?
Ans: Becoming a sole trader does not require registering with Companies House—only with HMRC for self-assessment. Only a limited company needs to register with Companies House.

End Notes – Choose BusinAssist Today!

Even if there is so much difference between a sole trader and a limited company in detail, both are equally functioning business models and can benefit you (if the model matches your goals). If you’re a sole trader and desire to register your business as a limited company, we can help you do that.

Here, at BusinAssist, we are the only Company Formation and Virtual Office provider in the UK that allows you to create your own unique office address and register your company with it.

Our competitors register thousands of companies to common addresses, making you indistinguishable. We let you choose your own unique company address and identity. With our Company Formation with Address package, you will never share the same address with another client.

So, choose BusinAssist as your partner in your business journey. Contact us today on our email: info@BusinAssist.com to find out more about our services!

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Difference Between a Sole Trader and a Limited Company Explained