Limited Company vs Sole Trader

Which is better?

Author

Millionaire Syrup
May 20, 2024

Limited Company vs Sole Trader

Which is better?

Sole Trader vs Limited Company

A limited company offers asset protection and scalability. This means that your personal assets are separate from your business assets, providing you with some protection. Additionally, as a limited company, you have the potential to grow and expand your business more easily. On the other hand, being a sole trader has its advantages too. It's simpler and less hassle to set up, and it can result in paying less in taxes.

The Differences

At a basic level, as a sole trader, you and your business are one and the same. For example, if you're a personal trainer, your business is an extension of yourself and you operate under your personal name. This means that all your business dealings, like invoicing and contracts, are done under your personal name. The advantage of being a sole trader is that it's a simple and low-cost process. You just need to track your earnings and expenses throughout the year and complete a self-assessment tax return at the end of the financial year. It's quick, easy, and budget-friendly, making it an attractive option for starting out.

With a limited company, you operate under a separate legal entity from yourself. Imagine you're a personal trainer and you set up a company called Pilates Limited. You register this company with Companies House, and it becomes a distinct entity separate from you as an individual. You can own the company by being a director or a shareholder. Operating as a limited company provides asset protection and can offer more opportunities for growth and expansion.

Tax Implications
Here’s an example of earning $100,000 after deducting all your expenses. As a sole trader, this income would be taxed just like regular income tax because you are personally receiving the payment. You can utilize your personal allowance, which is currently $12,570, as tax-free income. The amount you earn above that is then taxed at a progressive rate, with different tax bands. On the other hand, with a limited company, the tax structure is slightly different. The company earns money, and you have options for how you get paid. You can receive a monthly salary, which would be subject to income tax and National Insurance at the same rates as the sole trader example. Alternatively, you can receive payment through dividends, which are payments made to shareholders. Dividends have their own tax rates, which can be more advantageous in some cases.

Protection and Privacy

As a sole trader, if your business can't pay its debts, your personal assets like your home or car can be used to cover the cost. Additionally, your business name is not legally protected, which means that others can trade under the same name as you without your consent. This may not be a big concern when you're starting out, but as your business grows, it can become an issue in terms of brand confusion.

On the other hand, if you operate as a limited company, the company becomes a separate legal entity. This means that your personal assets and business assets are separate. If something happens to your business, creditors generally cannot go after your personal assets. However, there are exceptions, such as if you have signed a personal guarantee for a business loan or if you fail to meet certain direct duties. It's important to be aware of these potential liabilities.

In summary, operating as a sole trader offers less protection for your personal assets and business name, while a limited company provides more separation between your personal and business finances.

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