If you are planning to set up a new business in the coming months, you will need to consider what kind of legal structure the business will follow. Whether it be running the business as a sole trader, or running it as a limited company, you will need to decide which option is right for you.  The main difference between the two is that as a sole trader you are afforded complete control over everything, whereas a limited company will have its own legal identity, separate from its owners (shareholders), meaning its ownership will be split into equal shares. Ultimately, your decision will depend on the type of business that you are setting up and there are advantages and disadvantages to both. Let’s take a closer look into the definitions of each business structure and the differences between them.

What is a sole trader?

A sole trader is a self-employed person who owns their entire business, which is not legally separate from its owner. You are 100% responsible for your business and have complete control over everything.
The main advantages of operating as a sole trader are you get to make all the decisions, there will be less paperwork to endure and fewer tax responsibilities, this simplistic way of working is a very popular choice for these reasons.  Because you are running your business as an individual, you are able to keep any after-tax profits for yourself. It’s easy to set up as a sole trader too, just head to the gov.uk website.

However, your personal and business assets are not considered separate which means that as a sole trader you will be personally liable for losses or debts associated with the business.  With unlimited liability, your assets are at risk. As an example, if your business is in trouble, your assets (such as your home) are not protected and any debts that the business owes must be paid off by you.  You will also be fully accountable for all key business decisions, a significant responsibility to take on but, Sole traders are usually specialists in a particular service, such as plumbers, heating engineers, or electricians – as fully trained specialists in their niche, being fully accountable should not be an issue.

What is a limited company?

Setting up a limited company means that your business has a separate legal structure to you, therefore company finances can be kept separate from personal funds.  In the UK, a limited company must be incorporated at Companies House which bestows the business as being a separate ‘legal person’ from the people that run it and your company will be awarded a unique company registration number.

The main advantages of your business having a separate legal structure to you is that you will also have limited liability if the business goes under, meaning you will not have to pay all debts out of your personal finances.

As a limited company director, you are able to pay yourself more tax efficiently. If you combine your salary and dividends, you can find this beneficial when paying income tax, as dividends have a lower tax threshold.

Setting up a limited company does involve a lot more admin, as you must register with Companies House and pay corporation tax, so it can be a more time-consuming exercise.

You can find a complete step-by-step guide to set up as a limited company on the gov.uk website.

Sole trader vs limited company

The main difference between setting up as a sole trader and a limited company is that as sole traders, company owners will have unlimited liability, making them personally responsible for any business debts. It also works slightly differently when it comes to paying taxes. A limited company, being a separate legal entity, must pay corporation tax.  Anything taken personally by the owner, by way of dividends, must be declared in a self-assessment tax return and the appropriate income tax paid.  As a sole trader, things are simpler, with only the self-assessment tax return needing to be submitted.

Our team at Omer & Company are experts at cutting through the jargon, and we are here to support and advise small businesses when setting up as a sole trader or limited company.  We’ll help you to weigh up your options and make the right choice for you and your business. Once you are set up, our complete accountancy services are here for you.  We can help you with the financial side of running your company, allowing you to take care of what you do best – running your business.