Choosing Between a Sole Trader Or Limited Company: Which Is Right?
Choosing between a sole trader or a limited company requires some thought. It may not be immediately obvious which is the better choice for you.
There are pros and cons of running your business as a sole trader and a limited company owner. Sole traders have the most straightforward business operation in terms of setup and admin, but that doesn’t mean that this is necessarily the right path for you.
You should also think about how you can be tax-efficient with the income you expect to earn, especially in the early years. As a sole trader, you’ll need to pay income tax on any money made above the £12,500 personal allowance. You won’t have the choice to pay yourself a salary vs dividends, as you can as the director of a limited company.
As a limited company, you’ll be able to take home a salary of £8,632 (in 2021) without paying any national insurance or income tax. If your salary is less than £12,500, you will have to pay national insurance, but not tax. Paying yourself a combination of salary and dividends can help you be more tax-efficient, as dividends attract lower income tax rates than salary.
To recap, the difference between sole traders and limited companies comes down to liability. Limited companies have a limited liability business structure, meaning that their ownership is divided into equal shares. Sole traders, on the other hand, own and control their business entirely. As the sole company director, a sole trader is personally liable for making decisions for their company.
There is no right or wrong choice, but there may be better options for you, based on the company you plan to set up. Service-providing tradespeople who deal with individuals and families usually opt for sole trader status. Office-based businesses with multiple staff members, and businesses with plans to scale, are typically better suited to the limited company structure.