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Should you be a sole trader or a limited company?

Take a look at the benefits below.

So you think you have what it takes to start a business, but do you have a Sole Trader vs Limited Company battle taking place in your head?

We are a start-up business ourselves, having been where you are now. We understand the difficulties of making an idea into a viable business and overcoming the whole legality confusions that come with it.

The initial process of starting a business can seem intimidating for many aspiring entrepreneurs. Provided you have a solid business plan, starting up a business is easier than you may think. Whether your business is in products, services, or even a charity or community project, we’re here to help you.

The most important decision you must make before even beginning to trade, is to establish whether you are considering setting up a company or managing as a self-employed individual.

Based on our own adventurous journey (through countless hours of research, consulting with business experts and government bodies), we have compiled this article that will clear your migraine better than paracetamol. By the end of this article, you will be able to stand up in a hall of a thousand people and talk for England about the differences between running a business as a Sole Trader and a Limited Company. Okay, so maybe that won’t happen, but you will definitely be able to take a look at your own business and confidently make a firm decision.

Firstly, let’s make sure that you understand the meaning of Sole Trader and Limited Company.

What Is a Sole Trader?

A Sole Trader is quite simply someone who is self-employed. You are the business. The business is you. The whole business operation is run as a single entity. You will be responsible for all matters associated with the business.

What Is a Limited Company?

A Limited Company is a completely separate entity from its owner(s). It has its own legal status and is run by the owners, directors and shareholders. There are no restrictions on a Limited Company being governed by a single director or shareholder.

There is no fixed path that you have to follow when deciding how to operate your business. Let’s take a look at neighbours Michelle and Cassandra. They are both exceptionally good at canvas art. The two of them decide that they want to open a shop, separate from each other to sell their masterpieces. Michelle decides to sell online and sets up an ecommerce store. Cassandra is thinking about the bigger picture! She wants to set up a brick and mortar shop in the middle of the city centre. They are both essentially running the same type of business, but Michelle registers as a Sole Trader while Cassandra opts for the Limited Company route. Why is this? As a business owner, you will draw out your own business structure, calculate financial responsibilities and forecast a future projection that may vary from other businesses. Even if the other business is in the same niche.

Advantages of Running Your Business As A Limited Company

Taxman Comes A’ Knocking

Whether you’re a Sole Trader or Limited Company, you can’t run away from the taxman. A Limited Company pays less tax than a Sole Trader. In the UK, the company contributes 20% of profits to corporation tax. Keep in mind, taxes are only imposed after all expenses have been deducted, including employee salaries. The remainder of the profits can then be paid out to shareholders as dividends. A proportion of the profits can remain in the company’s account until it is needed or simply invested further into the business. The dividends will be smacked with income tax but not National Insurance (within the UK). A Sole Trader on the other hand, is legally required to pay income taxes on all profits and contribute to the National Insurance scheme.

Limited Unpredictability, Limited Liability

Unless your business entails running a stall at your local carnival as a fortune teller, no one can really predict the future. There is no way of preventing things from going wrong. Since a Limited Company is treated as a separate entity, any problems the business encounters that results in financial losses, will be directed purely at the company, and not at you. However, this does not apply when there’s an investigation into fraud that involves the directors and shareholders.

Looking the Part in Your 3 Piece Suit

Imagine you’re looking to get the whole interior walls of your home painted. You jump onto your laptop and Google search “interior decorator” or “house painter”. The top search results show a company called Perfect Painting and a self-employed character going by the name of Charles Ponzi. Based on their profiles and services offered, they appear to be equally suitable for taking on the job. Be honest, who are you most likely going to choose? The company will attract the majority of the clients because they present themselves as being more professional and credible.

With A Little Help From My Financial Friends

Most business owners don’t just settle for what they have. They will think of future prospects and with determination, they will strive towards greater goals. In the majority of cases, these huge aspirations require a little help from your friends at the bank. As a Sole Trader, you will have a tougher time trying to secure a loan. The quirky thing about bankers is that they can be pretty selective when it comes to making new friends. You’ll have a better chance of gaining the bankers trust as a Limited Company because your loan will be backed by the assets of your company. Fail to make your loan repayments, and the banker is now the biggest shareholder in your company.

What Your Company’s Name Says About You

Business owners exhaust an extensive list of possible company names before finally settling on the one that is most likely going to represent the true nature of the business and quality of the services provided. Only then do they shoot off to the Companies House to register their company name, discovering when they get there that the name “Google” has already been taken! Back to the chalk board!

A company name is protected by law. Once registered, no one else can use it. Sole Traders will often use their personal names when registering a business. This can pose quite costly if for instance, someone with the same name were to come along and carry out distasteful services. The link to your name may very well tarnish your reputation and cause you to lose out on potential business opportunities.

A Share of The Pie

A Limited Company is run by well-oiled shareholders. When you start up your company, you will have the option of owning all shares to the company or to invite other directors on board who can then also have a stake in the company. There is no limit to the number of shareholders a company can have, as long as there’s enough pie to go around!

You Can’t Take It to The Grave with You

When a Sole Trader retires or kicks the bucket, the business will cease to exist. On the other side of the wall, a Limited Company allows for shares to be transferable should a director leave or simply choose to sell his bite in the company.

Now let’s quickly go over what we have just talked about…

Driving your business down the straight Sole Trader road is without a doubt the faster approach, compared to the bendy road of the Limited Company. However, you can’t argue that the benefits of a Limited Company formation overshadows that of the Sole Trader.

We have taught you that with a Limited Company you will…

  • Pay less taxes.
  • Have limited liability over financial losses to the business.
  • Portray a professional image to your clients.
  • Find it easier to borrow funds for your business.
  • Be able to have multiple shareholders within the business.
  • Rest in peace knowing that your company will live on when you’re gone.

Remember, whichever path you choose, Acunov can help you with packages covering both Sole Traders and Limited Companies of various sizes.