Starting a business
When starting a small business, one of the first things to be decided is the legal structure used for the business. It can either be a sole trader, a limited company or a partnership. Setting up as a sole trader is the most popular legal structure in the UK, with approximately 3.5 million sole proprietorships in 2019. Sole traders accounted for 60% of small businesses in the UK. There were also 1.9 million limited companies, making it the second most popular legal structure.
What is a sole trader?
A sole trader is basically a self-employed person who is the sole owner of their business. It does not mean that he cannot have employees to work with, but the business is run by this one person. It’s the simplest business structure and you can set up by registering it with HMRC (you’ll need to do this for tax purposes).
What is a limited company?
A limited company is a type of business structure that has its own legal identity, separate from its shareholders and its directors. It also can be a one-man-band, when the sole director is the 100% shareholder too. But it can include more people as either directors or shareholders or both.
Sole trader advantages
- Easy set-up
- Less paperwork
- One self-assessment tax return per year
- Greater privacy, as sole traders do not appear in a public register
Sole trader disadvantages
- Unlimited liability: if the business gets into debt, the sole trader is personally liable, could lose personal assets
- Banks and investors tend to prefer limited companies, so this limits the investment or borrowing options.
- With higher profit the tax rates goes into the higher tax bracket
Limited company advantages
- Limited liability, which means that personal assets of the owners cannot be exposed, you may only lose what you have put into the company
- With higher profit, the Corporation Tax (19%) is more advantageous than paying personal Income Tax (20-40%) and National Insurance
- The company name is protected, no one else can register a company under the same name
Limited company disadvantages
- Added responsibility and filing requirements, such as Corporation Tax Return, Annual Account and Confirmation Statement
- Usually more expensive in the accounting fees because of the above extra paperwork
- Limited Companies can be found on the public register and the details of directors, company assets required to be shown publicly.