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Sole Trader

VS

Limited Company

The Positives at a glance

As a sole trader, you're the sole owner of your business. This means you get to retain 100% of the after-tax profits, giving you complete control over your income unless you choose to hire employees.
Registering as a sole trader is one of the easiest ways to start working for yourself. The process is straightforward, with minimal paperwork. You just need to register online for a self-assessment tax return and you'll receive your Unique Taxpayer Reference (UTR) number. From there, you'll only need to submit your tax return once a year.
Sole traders benefit from a simpler business structure, which usually means less admin. While you're legally required to complete a year-end self-assessment tax return, the ongoing accounting responsibilities are far lighter compared to running a limited company.
As a sole trader, you're fully in charge of your business decisions. You don't need approval from shareholders or partners, which means you can respond quickly to opportunities or make changes without delay.

The Negatives at a glance

One of the main disadvantages of operating as a sole trader is that you're personally liable for all business debts. If your business runs into financial trouble, your personal assets could be at risk.
Sole traders often find it harder to access external finance. You may need to rely on personal savings, loans from family or friends, or a small business loan and these can be harder to secure without a limited company structure.
Being the owner of a sole trading company means that you have management limitations! and this, in turn, will make it difficult for you to scale. You'll also have capital constraints, which means it's unlikely that you'll have enough money required to scale your business massively (although the word here is "unlikely" scaling isn't impossible).
Many sole traders work long hours, and that's because they have to fill the shoes of multiple different people within their business. A sole trader needs to oversee their business' day-to-day operation while also managing advertising and marketing, finance and tax responsibilities, customer service duties, and planning and strategy for the future. This responsibility can feel overwhelming for a single person.

The Positives at a glance

One of the biggest advantages of a limited company is tax efficiency. As a company director, you can pay yourself through a mix of salary and dividends. Dividends are taxed at a lower rate than income tax, which can reduce your overall tax bill.
Most people setting up a business aren't thinking about leaving any time soon. But if circumstances change, it's helpful to know that limited companies tend to offer the best opportunities for a "clean break" compared to other business models. You can sell shares or bring in investors more easily than you can as a sole trader.
With a limited company, your business is treated as a separate legal entity. This means your personal assets are not at risk if the company faces financial difficulties, the liability is limited to the company itself. All shareholders will be responsible for the debt, which means that your personal assets are protected.
As a company director, you're protected from being personally sued in most cases. Legal action would typically be taken against the company, not you as an individual, which reduces the personal risk of operating your business.

The Negatives at a glance

Running a limited company involves more accounting and reporting duties. You'll need to file corporation tax returns, submit annual accounts to Companies House, and comply with Making Tax Digital. Directors also usually need to submit personal self-assessment tax returns.
All limited companies must prepare and file annual accounts, which are made public via Companies House. This adds transparency but also increases your reporting responsibilities, compared to sole traders who aren't legally required to publish accounts.
Limited company owners or directors can't freely draw money from their business bank account. Additionally, any losses made by a limited company can only be used against the company's own profits. When you're a self-employed sole trader, on the other hand, you can usually use a loss to reduce your overall income tax.
As the director of a limited company, you have less freedom to make decisions than a self-employed sole trader. Any planning or strategy will need to be discussed with all the owners of your limited company, and only decisions that everyone agrees upon can be implemented. This means that it may take much longer to introduce a change to your business' operation.

At a glance - the positives

100% of the profits

As a sole trader, you keep 100% of your after-tax profits. Unlike a limited company, there's no split ownership or shareholder cuts.

Tax efficient

Limited companies offer tax advantages through salary and dividends. This structure can reduce your overall tax bill.

Easy to get started

Setting up as a sole trader is quick and simple. You just register for self-assessment and start trading

Easier to leave

It's easier to exit or sell a limited company. You can bring in investors or sell shares if needed.

Less admin

Sole traders deal with far less admin than limited companies. You'll only need to complete a yearly tax return.

Losses and debts are not personal

A limited company has its own legal identity. This protects your personal assets from business debts.

You make the decisions

Sole traders can make fast, independent business decisions. There's no need to consult shareholders or directors.

You won't get personally sued

Legal claims are made against the company, not you personally. This lowers your legal risk compared to being a sole trader.

At a glance - the negatives

Unlimited liability

Sole traders are personally liable for business debts. This means your personal assets could be at risk.

More financial admin

Limited companies face more tax and reporting obligations. You must file corporation tax and annual accounts.

Limited access to finance

Sole traders may struggle to secure funding. Lenders often prefer the structure of a limited company.

You must prepare annual accounts

All limited companies must publicly file accounts. This adds transparency but increases your admin burden.

Limited routes to expansion

Scaling a sole trader business is harder due to funding and capacity limits. Growth potential can be restricted compared to a limited company.

Taxation rules are more rigid

You can't withdraw money freely from a limited company. Losses can't offset your personal income like they can for sole traders.

You are fully responsible for your business

As a sole trader, you manage everything yourself. This can lead to long hours and burnout.

You have less input

As a director, you may need approval from others to make changes. This can delay business decisions compared to a sole trader.

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