Sole trader vs Limited company

Posted by Vidit Agarwal on November 24th, 2021

Sole trader is owned and controlled by one person who has unlimited personal liability for the business whereas a limited company will have its ownership split into equal shares.

What is a limited company?

In a limited company, tax is deducted from executives\' pay rates by means of Pay As You Earn (PAYE) and paid at normal interims to HM Revenue and Customs (HMRC). All chiefs are likewise obliged to finish a tax return unless they got positively no pay or advantages; regardless of whether any tax is owed. If the chiefs are likewise investors, they may get dividends from the company. From 6 April 2016, another rate of profit tax is payable by investors on dividends above £5,000pa under the self-assessment administration.

What is a sole trader?

Sole traders pay tax on their business benefits, by means of the self-assessment tax return framework. The due date for online tax returns is 31st January after the finish of the tax year.

Difference between a sole trader and limited company

The differences between a Sole Trader and a Limited Company each structure has points of interest and detriments which are delineated underneath to enable you to pick the best alternative for your conditions. Liability A limited company is its own particular legitimate personality, so as an investor your risk is limited (consequently the name \'limited by shares\'). As a sole trader, there is little refinement among you and the business. Any business obligations turn into your obligations and your personal resources - including your home - are not ensured. When it comes to choosing the best option for your business, there is no single magic answer.

Limited company pros and cons

  • Limited liability. This means that the liability of shareholders is restricted to the amount paid for shares.
  • Shareholders will not be held personally liable for company debts.
  • It is expensive to wind up the business.
  • A limited company is a separate legal entity from directors and shareholders.
  • Generous tax breaks for directors on pensions.
  • The company is taxed at the corporation tax rate.
  • Registration of a business name does not protect against others operating under the same name.
  • In the event of the director’s death, shares can be passed on or sold, so the business does not have to cease.
  • Limited companies are looked upon more favourably when it comes to accessing bank credit.

Sole trader pros and cons

  • It is very cost-efficient and easy to set up and run this type of business.
  • The sole trader or partnership does not have to register accounts with the CRO.
  • There is no limit on personal liability for the debts of the business.
  • There is only a small cost to wind up the business.
  • Limited scope to avail of pension tax breaks.
  • Public does not get to access accounts.
  • A sole trader does not need to register as an employer.

From purely a taxation point of view, in most cases, it’s better, even for small, one-person companies, to run as a limited company than be a sole trader. You can get in touch with limited company accountants near you for more information.

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Vidit Agarwal

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Vidit Agarwal
Joined: March 9th, 2018
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