One of the first dilemmas you may face when starting a business is choosing between setting up as a sole trader or a limited company.

Each has its advantages and disadvantages, but knowing which will work best for your business is a vital question.

If you’re unsure whether to work as a sole trader or a limited company, this article will give you the information you need.

Sole trader vs limited company – what’s the difference?

There are a few differences between working as a sole trader or a limited company. The main one is that a sole trader is the only business owner with complete control, meaning they have total liability for the business.

A limited company will split its ownership into equal shares and require a director. This means shareholders will all have a say on important decisions for the business. The shareholders will have limited liability for the company, adding a level of financial protection.

How your business’s tax returns are submitted will differ depending on the business structure. A sole trader will be responsible for completing a self-assessment tax return for HMRC each year. A limited company will have a company tax return to prepare and pay corporation tax.

Pros of being a sole trader

Working as a sole trader will mean you’re your own boss. You can bring your flexibility into the business and market your values as your business’s values.

You’ll be able to offer a more personal service to your clients and will be able to change up your structure when and if you need to.

When your company starts making a profit, it will be yours and yours alone (once you have settled your tax liabilities with HMRC).

Also, less admin work is involved compared to operating as a limited company.

Cons of being a sole trader

Even though owning and running your own business has its benefits, it’s not without its stresses.

As a sole trader, you’ll be financially responsible for any shortfalls or debts you may incur when operating. As you and your business are a single entity in the eyes of HMRC, you’re entirely liable for any issues you may face.

You’ll also be the only person who can make decisions about how your business runs, which can sometimes be quite cumbersome.

Your tax will be less flexible than if you were a limited company. Once you hit the personal allowance thresholds, you’ll pay set tax rates to the Government and National Insurance.

Pros of being a limited company

As mentioned above, operating as a limited company minimises personal liability when your company’s finances are involved. Any debts or losses associated with the company are the company’s responsibility, not its owners.

You’ll be more tax efficient as a company director, making up your wages from a mix of salary and dividends, both of which are taxed differently. If done correctly, you can pay yourself before hitting the tax thresholds, meaning while you still will pay tax, it’ll be less than if you were a sole trader.

And, as you’ll have shareholders, you won’t need to make the crucial decisions on your own.

Cons of being a limited company

The amount of admin you’ll have to do as a limited company will be sizeable. You’ll need to register with Companies House and pay the incorporation fees.

Privacy will also be something to factor in. As a limited company, your personal and corporate information will be on the public record, so you’ll need to follow the best practices.

Record keeping is an essential requirement of companies, especially when submitting a company tax return and confirmation statement.

How to choose which is right for your business

Like any decision, you’ll need to weigh up the pros and cons of each option. You’ll need to base your decision on how you want to operate as a business and think about how much time you have to dedicate to your work.

If unsure, the Smith Butler team can offer you independent and reliable advice on which path to take.

Get in touch today.