Sole trader vs limited company: which is better?

A sole trader is a business owner who carries out all the business operations themselves. A limited company is a business structure in which a company limited by shares is formed. This means that the company has a set number of shares, and each share represents an ownership stake in the company. So, sole trader or limited company, which is better? Limited companies are often preferred by businesses because they offer more flexibility and protection from personal liability.

What is a limited company?

A limited company is a registered company that has been granted limited liability. This means that the company is not liable for the debts of its directors or shareholders. Limited companies are popular in the UK because they offer a number of benefits, such as the ability to raise money easily and the ability to operate with just one shareholder or director.

Registered with Companies House, limited companies must file annual reports. They are also subject to a range of regulations, including those related to taxation and the required level of financial resources. If you are thinking of setting up a limited company in the UK, be sure to consult a company formation service provider. They can advise you on the various legal and financial considerations involved in setting up a company.

Sole trader vs limited company

There are several pros and cons for sole traders and limited companies, but the main difference is how they are taxed.

• A sole trader is taxed on their entire income, while a limited company is taxed on its profits.
• A limited company also has more flexibility in how it runs its business. It can be more geared towards growth, which can give you more opportunities to make money.
• Ultimately, the decision of whether to be a sole trader or a limited company is down to what you are looking for in your business. If you are looking for flexibility and ease of management, a limited company might be a better option. If you are looking for more opportunities to make money and less bureaucracy, a sole trader might be the better option for you.

What are the advantages of being a sole trader?

The main benefits of being a sole trader include:

• Being in charge of your own business can be a great perk to you as a sole trader – you get to make all the decisions and run your company however you want.
• A sole trader business can be set up in the UK without any cost.
• You can start trading in the UK under your own name or another name – there is no need for either your name or the other name to be registered with HMRC. You do, however, have to provide a business address that you can choose to withhold from the public or include in your marketing materials and on your business stationery.
• Much like being the captain of your own ship, as a sole trader, you are responsible for the success or failure of your business. This means that you have a greater responsibility to not only yourself but also to your customers or clients.

What are the disadvantages of being a sole trader?

• The sole trader has a lot of responsibilities to handle. You’re in charge of everything, from your company’s profits and losses to your own tax liabilities. If you’re not prepared to take on the risk, this can be a major disadvantage, as you’re the only person responsible for your business.
• There is the risk of personal bankruptcy if your sole trader business fails in the UK.
• The sole trader is personally responsible to settle legal disputes and business debts.
• Generally, agencies and certain industries in the UK hesitate to work with sole traders and self-employed freelancers.

What are the advantages of a limited company?

• A limited company can be incorporated online without visiting the UK.
• It does not cost much to incorporate a limited company in the UK.
• The structure of a limited company in the UK is accepted worldwide, giving limited companies a global reputation.
• Companies have to pay a low 19% corporate tax, which is one of the lowest in Europe after Bulgaria, Hungary, and Ireland.
• Foreign entities can easily open business bank accounts in the UK.
• They are also exempted from paying taxes in the UK, if the board members or company beneficiaries live outside the UK or if the company does not open a physical office or does not sell goods or services. The company must, however, consider this option carefully, as it will not be able to avail of tax treaties and may be liable to pay higher taxes elsewhere.
• A company can deduct 30% of its R&D spending from its taxes.
• Any dividend paid to a foreign resident or a UK company is exempted from tax.
• Companies with at least 10% holdings in subsidiary companies can sell them without paying any capital gains.

What are the disadvantages of a limited company?

• Since the UK left the European Union in 2020, businesses in the UK have found it difficult to access the EU markets due to customs delays and tariffs.
• Work visas are needed to hire non-UK staff based in the European Union.
• Trade agreements are needed to work with global partners, which takes time to accomplish.

Changing from a sole trader to a limited company

1. The limited company must be registered, and:

• Provide a unique company name
• Establish a registered office address
• Declare one shareholder at the least
• Appoint one or more directors
• Provide the UK address of each shareholder and director
• Comply with Standard Industrial Classification (SIC) code(s) that describe its business activities

2. Inform HMRC about the change with the following details:

• Date on which sole trader status ceased
• Nature of business
• National Insurance number
• Unique Taxpayer Reference (UTR) number
• Name
• Date of birth
• Address

3. Transfer business from a sole trader to a limited company.

4. Set up a business bank account with your limited company name.

5. Notify your bank, financers, lenders, clients, contractors, employees, suppliers, service providers, debtors, and other stakeholders about the sole trader to limited company change status.

6. After your new company has been incorporated, Companies House will let HMRC know. You’ll get a letter from HMRC sent to your company’s registered office address within around two weeks of incorporation.

7. You will receive guidelines about how to file and pay taxes along with your limited company’s 10-digit Unique Taxpayer Reference (UTR) number.

8. Within 3 months of starting to trade after incorporation, you are required to register for corporation tax online.

9. Register for VAT when your estimated VAT taxable turnover is likely to exceed £85,000 within a 12-month period.

Establish your limited company in the UK with Workhy

If you’re thinking about starting a business, it’s important to know the difference between a sole trader and a limited company in the UK. Workhy offers company formation services to entrepreneurs from all over the world so that business owners can establish their limited companies online without having to travel to the UK. Workhy also offers additional services like VAT registration, monthly or yearly accounting, VAT return preparation, opening online bank accounts, and managing financial processes. Click here to learn more about Workhy.