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Sole trader or limited company - which is best for you?

Sole trader or limited company - which is best for you?

Congratulations, you’ve decided to start your own business. The next big decision is whether to set up as a sole trader or limited company. Depending on the size and nature of your business, there may be pros and cons to each of the structures. To help you determine which legal structure is best for your business, we’ll summarise some advantages and disadvantages of setting up as sole trader or limited company.

There are other options for trading formats, for example partnerships, but we will deal with these in later articles.

Advantages of limited company

  • Your liability is limited to the value of your shares. However, directors may be asked to personally guarantee loans and large credit agreements.
  • Generally seen as a more tax efficient way for a small business to trade but the incremental tax benefits have reduced over the last few years.
  • It’s easier to pass on company shares when leaving a legacy or selling your business.

Disadvantages of limited company

  • There’s more admin, including more complex accounting and tax requirements. This probably won’t bother you if you are fairly organised.

If you make a loss in your first year there are more restrictions on claiming a tax refund. You can, however, use the loss to reduce future tax bills.

Advantages of being a sole trader

  • Being a sole trader is easier than being a limited company. There’s less admin, which saves time and money. You may see this as a huge benefit if admin is your weak point. If you’re a Starling customer, the Business Toolkit can make the admin even easier.
  • First year losses can be used to reduce any other tax due that year, so you might even get a refund.
  • In some circumstances, it might be the best way to minimise your tax, especially when business profits are lower.

Disadvantages of being a sole trader

  • In the event that you have unlimited liability. Taking out an insurance may minimise your risk in some, but not all, areas.
  • It is harder to pass on the business through inheritance or sale.

Other differences between sole trader and limited company

As a sole trader your annual accounts are private between you and HMRC, although you may be required to show them to banks and suppliers in order to obtain loans or credit. As a limited company, your annual accounts, in a summarised format, will be in the public domain at Companies House. However, this may make it easier to get credit.

Directors of limited companies also have certain responsibilities enshrined in law. In general, they are required to put the interests of the company as a whole before their personal interests.

Should I be a sole trader or limited company?

Remember that you can move from one structure to the other in the future. it’s quite common for businesses to start as a sole trader and then incorporate (form a limited company) later.

Find out more about the process of setting up as a sole trader or limited company:

Setting up as a sole trader

Setting up as a limited company