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Sole Trader vs. Limited Liability Company

As a business owner, naturally you want to do what is best for your business. You want to ensure that your venture has every chance of success, which is why getting things right when it comes to the type of company that you choose to run is so important.

In the UK, there are various types of business entities; these include corporations, cooperatives, partnerships, sole traders, limited liability companies, and various other specially labelled business types.

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Of all of the company types, the two most popular options are sole traders and limited liability companies – these are the two options that are most popular with business owners. To learn more about company formation visit this website: www.yourcompanyformations.co.uk. There is a lot to learn, but by taking advantage of these kinds of resources, you can make it much easier for yourself to choose the right option.

To help you determine which of these options is the best fit for you, below is a guide to the pros and cons of each. For everything that you need to know, read on.

Liability

The main difference between sole traders and limited companies is the fact that a limited business is its own entity and is separate from the business owner. Whereas a sole trader has little distinction from their business – the business owner and the business are seen as one entity, instead of being separate.

The issue with the business owner and the business itself being classed as one, intertwined thing, is that should things go wrong, personal possessions can be seized as collateral for your business’s debts. However, with limited company, this is not the case, as your personal finances and your business’s finances are completely separate.

Tax

Then there is the difference when it comes to taxes. With a limited company, tax is taken from the directors’ salaries via PAYE (Pay As You Earn) and paid to HMRC at regular intervals, like it is for employees. As part of this, all directors have to complete a tax return each year, regardless of any tax is owed. If the directors also hold shares in the company, they may receive dividends from the company, which tax may need to be paid on. (Tax is payable on dividends above £5000 per year – this is done via self-assessment.

Whereas, sole traders pay tax based on the amount of money that their business has earnt, not the amount that they have been paid. The system used to calculate the amount of tax that sole traders have to pay is the self-assessment system.

When it comes to preparing accounts for tax returns, limited companies are required to put together annual accounts for the entire financial year. These are given to HMRC as part of the tax return and are used to work out exactly how much tax is owed. Whereas, a limited company is required to send a Confirmation Statement to Companies House, including information about the directors and shareholders, as well as profits.

While sole traders don’t legally have to keep annual accounts, they do have to have a record of all business expenses and expenditure, as well as annual income, so that they can fill in their tax return.

 

National insurance

When it comes to National Insurance payments, it differs depending on the type of business. For limited companies, National Insurance for both employers and employees is payable from directors’ salaries and their bonuses. This means that the National Insurance paid is greater for limited companies than it is for sole traders.

More credible

Although limited liability companies don’t guarantee that they are reliable, they do tend to be seen as being more credible than sole traders. For instance, in some areas, you will find that some contractors prefer not to work with sole traders because they do not have the legal protection that a limited company provides. Of course, just because some contractors think like this, that doesn’t mean that will always be the case. However, it is worth taking note of this, when it comes to selecting the type of business that you want to build.

The fact is that when you run a business via a limited company, the business looks more impressive, hence the additional credibility. The reason for this is because a limited company tends to look like a larger, and more well-established operation, compared to sole trading. When it comes to landing clients, being seen as a larger and more well-established company can be hugely beneficial.

The truth is that sole traders and limited liability companies are both very different from each other. When a business is registered as a certain business type, it changes a range of different things for that venture, from the amount of tax that needs to be paid to how it is paid. The key thing to remember is that what works for one business, may not work for another. That’s why each business owner has to make their own decision when it comes to what to register their business as and determine what works best for them.

There are advantages and disadvantages to both options; it’s just a case of attempting to determine which of these two options is the best choice for you and your business. Just because one option works for your competitors, that doesn’t mean that it will work for you. The best thing to do is take an in-depth look at the various pros and cons and use them to attempt to work out which, of all the options available to you, is best for you and your business. If you are not sure which option to go for, you may find it beneficial speaking to your business mentor, if you have one, or failing that, a business advisor. Whatever you do, don’t rush the decision or the process, take the time that you need to, to ensure that whatever decision you come to, it is the right one for you and your business.