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Limited Company vs Sole Trader

Should I open a company or stick with being a sole trader?

I hear this question come up quite a bit and to be fair with all the tax savings being slowly stripped away from limited companies, it is no wonder business owners are in a bit of a quandary when trying to weigh up the pros and cons.

I would like to break down the advantages and disadvantages for you and hopefully help you make a more informed decision.

Limited Company Pros

  • You could appear to be a larger entity than you currently are. This may attract larger business clients.

  • It is more tax efficient to become a limited company once your profits reach a certain threshold. Usually when profits reach over £50k it is worth looking into.

  • You can apply for loans and certain funding.

  • Your company would be a separate legal entity meaning if your business fails your personal assets-such as your house-will be protected.

Limited Company Cons

  • Setting up a limited company is more complex.

  • There are laws that a limited company must abide by, such as filing annual accounts to Companies House as well as to HMRC, ensuring you have at least one Director, filing Annual Declarations to Companies House, keeping records of directors, shareholders, company secretary (if you have one), loans. A full guide for legal requirements can be found by following this link: HMRC

  • Accountancy Fees for filing a limited company return will be much higher than that of a sole trader.

Sole Traders Pros

  • It is very straightforward to set yourself up as self employed. Simply contact HMRC using this link HMRC. You must also remember to ensure you have business insurance in place and check with the ICO (Information Commissioners Office) if you need to register and pay the data protection fee.

  • You will have full control over your business unlike a limited company.

  • It is relatively cheap to set yourself up. Website, logos, wages, branding - all these can be done at a low cost.

  • Unlike a limited company, you can take all the profits out of the business and spend it on what you like.

  • As a sole trader there are much less legal obligations. All you are required to do is to submit and pay your self assessment tax return.

Sole Traders Cons

  • Unlimited liability-unlike a limited company you are responsible for all the business debts. So if your business was to run into financial trouble and you could not pay back the debts your personal assets could be at risk.

  • Banks are less likely to lend to a sole trader.

  • Sharing the burden. As a sole trader we tend to work by ourselves. This can be difficult when we need to bounce ideas around or need to share some of the workload. Of course there are Network events you can attend and you can hire an associate or employee to help with the day to day running of the business.

  • Larger companies may only want to deal with limited companies as this can give the impression of stability.

So, there you have it, a simplified list of the pros and cons of both Sole Trader and Limited Company.

If you require a more in depth assessment of the financial implications of becoming a Limited Company I would recommend you seek advice from an accountant.

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