Limited Company v Sole Trader: Which Should You Choose?

by Oct 27, 2022Uncategorized

Business owners have a few options when it comes to structuring their business, but two of the main routes to go down are operating as a sole trader or as a limited company.

Each option has its own tax implications as well as other working processes to consider.

If you aren’t sure which may work best for you, this article will explain the differences as well as the advantages and disadvantages.

What’s the difference?

One of the biggest differences between being a sole trader or part of a limited company is the tax you’ll have to pay on your profits, but it doesn’t end there.

Sole traders will essentially be the only ones in control of the business, meaning they will make all the major decisions and be fully responsible for the financial stability.

Starting a limited company will mean you are on the board of directors and won’t be as tied to the business as you would be as a sole trader. This means you will have less personal financial risk should you run into any issues.

There are several other factors to consider when deciding, so continue reading to find out more.

Responsibilities of a sole trader

As mentioned, it’s your full responsibility as a sole trader business owner to make all the important decisions throughout your business’ lifecycle.

While you’ll be able to keep all of your business’ profits, you will also be fully liable for any losses or debts your business incurs. As you’re the only person in charge, you will have full accountability.

You will also have to take full ownership of your taxes. You’ll have to prepare and file a self-assessment tax return with HMRC every year. In this, you’ll have to declare your business’ profits, claim back any allowable expenses and pay your income tax and National Insurance contributions (NICs).

Although that seems like a lot of work, you will also be able to shape the business as you see fit, carrying over any of your personal values into your processes.

Running a limited company

Registering with Companies House will be the first step towards running your own company. In doing so, you’ll be separated as a legal entity from your company which will keep your personal finances separated too.

All company shareholders will have limited liability, so debts and losses won’t come straight out of your pocket.

Also, as a director, you will be able to pay yourself in a tax-efficient way. You can do this by paying yourself a lower salary (usually slightly under the personal allowance) and topping up with dividends.

As dividends are taxed differently, you could save some money that higher income tax bands usually eat up.

Unfortunately, running a limited company comes with its fair share of paperwork. Registering with Companies House is just the beginning. You’ll also have to submit annual confirmation statements. If you don’t send your statement in time, you risk being landed with a £5,000 penalty and having your company struck off the register.

You will also have to prepare and file corporation tax returns and pay your corporation tax balance to HMRC, which is currently set at 19%. As of April 2023, corporation tax will increase to 25%.

We can help

Diamond Accounts offers a range of services which could help you and your business stay on top of your taxes.

Whether it’s accounts preparation, help with your self-assessment or even management accounts, our team will work tirelessly to make sure you’re doing the right thing.

Get in touch with our team today.


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