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 or 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 can not 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 Director or Shareholder or both.
Sole trader advantages
One self-assessment tax return per year
Greater privacy, as sole traders does 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 investing or borrowing options.
On higher profit the tax rates goes into the Higher tax bracket
Limited company advantages
Limited liability, which means that personal assets of the owners can not be exposed, you may only lose what you have put into the company
On 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.