Sole Trader or Limited Company: Pros and Cons
In starting your company, the story generally begins in a one-person business structure. You are accountable for managing account management, marketing and anything related to the services you provide to clients.
You answer the phone, send the e-mail and even make tea. Is this true in business? Yeah, not necessary. You are also allowed to establish your own small company by creating an established LLC. We will discuss the definition of limited companies and the sole trader.
We’ll explain some positive and negative aspects of a particular solution and let you decide what’s most appropriate for your situation.
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What is a Sole Trader?
Before we dig into the concepts, we must first know what sole traders mean.
For starters, a sole trader is an individual who uses trading as a business. This definition means that the only person who will manage these matters will take care of the whole operation and ultimately keep the profit is its owner.
They can be financed either through personal or private funds if needed. Because the business owner running the business is just one person, its personal assets and personal finances may be compromised, or worst could be gone forever because they are personally liable for any move they make.
However, what’s good about it is that since it is your own business, the assets of your small business and all the profits are all yours, no questions asked. But since that is the logic, all the business debts and losses you are experiencing are all shouldered by yourself.
What is a Limited Company?
Now that we get the gist of a sole trader let us now move on to knowing what is a limited company.
A limited company is a registered company with shareholders who actively contribute to the business to make money. The shareholders can receive a portion of their declared profits based on the number or kind of shares owned.
Limited corporations may have one or more people as shareholders or several. They may have different shareholders. A company limited by shares has more legal responsibility than one-time traders.
Since a limited company involves different kinds of users, such as shareholders or the limited company owners, they may have set a regulation that binds the limited liability partnership to clarify the legal responsibilities. The agreement may also contain a company director to oversee and help prepare annual accounts.
Unlike a sole trader business, a limited company has its own legal identity. However, the only downside is more legal responsibilities and tax reliefs. However, this is manageable, unlike bearing all the personal circumstances your business might encounter.
Advantages of Being a Limited Company
In 2020, 2 million out of 6 million businesses in Britain were actively operating limited company activities. The process of becoming an LLC can be called incorporation. Getting into limited companies can be very beneficial if you know its disadvantages.
Advantages of this system are:
It gives you tax advantages
You can be a separate legal entity from your business structure, so you get to pay corporation tax instead of personal income tax. This is an advantage because the corporation tax costs are lower than the income tax.
Apart from being immune from paying income tax, you can also be exempted from national insurance. These other benefits may help you save on tax.
Attracts investment easily
Since you are operating a limited company, you should be able to attract more quickly than you do when compared to small businesses like those of sole traders.
Investors tend to be more attracted to a business with shares in stocks because this is how they get to be part of a promising company.
Limited liability protection and immunity
This form of legal protection wards off individual company directors from being personally liable, whatever the profit and loss account may reflect.
This is also where being legally separate from the company has a more significant impact. With the big legal difference, you get to have a life more secure than ever.
Disadvantages of Being a Limited Company
The various advantages above may sound promising; however, there are still drawbacks that you need to assess before being drawn to shifting your own sole trader company to a limited company.
Advantages of this business venture include the following:
More paperwork
The limited company may enjoy the advantage of not paying a personal tax return which makes it have less paperwork; however, it must still file the following:
- A set of accounts,
- Confirmation statement,
- and Corporation Tax Return.
With all of this, you are bound to experience added paperwork.
Public record
Your new business may now become subject to public records because it has become a public domain, which means that your company’s financial information will be subject to every user inside or outside your company.
Any financial information includes books of accounts and financial statements that include a balance sheet.
Consult shareholders
Since you are a limited company, you are also bound to consult the shareholder first before coming up with a big decision that may affect the whole limited company.
This is included in the drawbacks because the processing of a decision may take a while instead of fast-action decision making.
Frequently Asked Questions
Do You Pay More Tax as a Sole Trader or Limited Company?
As mentioned above, you get to save how much tax you will pay when you convert your small business into a limited company.
In addition, limited firms are generally considered more tax-efficient than sole traders because they pay corporate taxes rather than income taxes. After all, you are self-employed.
Is it Better To Be a Limited Company or Self-employed?
If your business owes you personal obligations, you could lose your valuables. However, your limited liability enables your personal asset protection. Put you in an entirely different situation.
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