Sole-Trader VS Limited Company

Sole Trader

A sole trader is a business owned and run by a single individual responsible for all aspects of the business and making all the decisions. They are also personally liable for any debts or legal issues that arise.

Limited Company

A limited company, on the other hand, is a type of business structure in which one or more shareholders own the business, and the shareholders are not personally liable for the company’s debts.

Key Differences Between Sole Traders & Limited Companies;

Liability

As a sole trader, you are personally liable for the debts of your business. This means that if your business cannot pay its debts, creditors can go after your personal assets, such as your house or savings.

In a limited company, the shareholders are not personally liable for the company’s debts. This means that if the company cannot pay its debts, creditors can only go after the company’s assets, not the personal assets of the shareholders.

Taxation

As a sole trader you are taxed on your personal income, including any profits from the business.

Limited companies are taxed on their profits, and the shareholders are taxed on any dividends they receive from the company.

Administration

As a sole trader you only need to file a self-assessment tax return each year.

However, when MTD comes into effect, in April 2024, If you are a Sole Trader will be requested to deliver 4 tax returns at the end of each quarter and one final return at the end of tax year.

If you are running a limited company it tends to be more administratively complex than being a sole trader.

As a limited company you must file annual returns and financial statements with Companies House and HM Revenue and Customs, and they may also be subject to additional regulations.

Sole Traders & Limited Companies advantages and disadvantages

Both types of business have their advantages and disadvantages.

To be a sole trader you have more flexibility and control over your business, as you do not have to answer to shareholders or directors. However, you also have more personal liability and may find it harder to secure funding or investment.

As a Limited company you have the benefit of limited liability, which provides a sense of security for the owners. However, you may have more administrative responsibilities and may need to follow more stringent regulations.

Being a Sole Trader or a Limited company?

Ultimately, the decision between operating as a sole trader or a limited company will depend on your specific business needs and circumstances. It’s worth seeking advice from your accountant, to help you choose the right business structure.

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