Ltd Company vs Sole Trader – What’s the Difference?

Every business, no matter how big or small, must operate within a legal structure.

One of the first crucial decisions when setting up a business, is which legal structure to form.

The most popular choices are Limited Company or a Sole Trader – We’ve summarised the pros and cons of each to help you decide the best fit for you.

What is a Ltd Company?

A Limited Company has its own legal identity (separate to that of its shareholders and Directors) and it’s finances are therefore, completely separate from your personal finances. 

Advantages:

  • Directors / Shareholders of a Limited Company have limited liability on losses or debts incurred by the business. This means that personal assets aren’t exposed – If things go wrong, you only stand to lose what you put into the company.
  • As a Director (and shareholder), you can pay yourself a combination of salary and dividends – Dividends have a lower tax threshold, so paying yourself a combination can be more tax efficient. (However, dividends can only be declared if the company makes a profit).
  • Benefits such as pensions are allowable business expenses giving directors tax advantages (tax relief can only be claimed up to a maximum of 100% of the Directors salary – up to an annual limit of £40,000).
  • You can register the limited company name in the same name you trade under and no one else can use it – (Providing the trading name is not already registered with Companies House).

Disadvantages:

  • Slightly more complex set up process and you’ll incur fees for Limited Company incorporation.
  • More tax requirements to consider – You will pay Corporation Tax on profits each year –  Dependent on the level of profits, you could end up paying more tax than in comparison to a sole trader or partnership.
  • Information on your business will be made public on Companies House (details on Directors and company earnings) – Some business owners might not find this appealing.
  • If you pay personal expenses through the business and end up owing the company money, you and the company will have to pay extra tax on this benefit.

What is a Sole Trader?

If you choose to set up your own business as a sole trader, you are personally responsible for your business and the business is controlled by just one person. It’s the simplest company structure out there and is the most popular. 

In the eyes of the law, the business and yourself are the same, meaning you’re personally liable for any losses or debts that incurred by the business. 

You will pay income tax on all profits (minus expenses) and Class 2 and 4 National Insurance. 

Advantages:

  • Easy set up process with HMRC.
  • You can keep all after-tax profits.
  • You can withdraw cash from the business without tax effect.
  • Relatively little ‘administration’ other than a requirement to complete an annual Self Assessment Tax Return.
  • Greater privacy, as details and accounts are not made public on Companies House.

Disadvantages

  • Sole Traders have unlimited liability, so if things go wrong you will be fully liable for any loss the business makes and for any funds owing to HMRC and Creditors – This means your personal assets could be exposed.
  • Tax rates aren’t as lucrative on higher earnings.
  • No share of accountability meaning all business decisions fall on you.
  • Difficult to raise finance, as banks and investors tend to prefer limited companies, this could limit expansion opportunities. 

How can we help?

Fairmile will help you set up your business in a way that suits your needs. With years of experience helping hospitality clients operate as efficiently as possible, we’ll take the stress out of setting up your business in the best way for you and hold your hand through the process…

Contact us today to find out more.