How to decide between Sole Trader and Limited Company ?

A comprehensive overview of the advantages and disadvantages of being a sole trader verses a limited company, all you need to know.

I’ve been in private practice for over ten years now. Throughout that time, I’ve been a sole trader. I initially chose this option because it was an easy, stress-free way to establish my business. In 2022, I became a limited company. Making the switch felt like a scary step, but with support from my trusted accountant and having a clear business plan in place guiding the direction of my business, I decided to take the plunge. I thought I’d share my reasoning with you, as I know it can be confusing. So, sole trader or limited company – which option is right for you?

Sole Trader or Limited Company - What’s the Difference?

Choosing the appropriate business structure is a significant decision that can have a profound impact on your venture's success and your personal liabilities as a business owner. Two common options often considered are sole trader and limited company. Each structure comes with its own set of characteristics, advantages, and disadvantages that warrant careful consideration.

Starting as a sole trader, also known as a sole proprietorship, offers a straightforward and easy way to set up a business. As the sole proprietor, you have full control over the business, enabling quick decision-making and flexibility in managing day-to-day operations. A significant advantage of being a sole trader is that you get to keep all the profits generated by the business after taxes have been deducted. However, the flip side is that you are personally liable for all losses and debts incurred by the business. In the event of financial difficulties or legal issues, your personal assets may be at risk.

On the other hand, forming a limited company creates a distinct legal entity separate from its owners. The company's ownership is divided into shares, which allows for multiple shareholders. This division of ownership makes it easier for a limited company to attract investment and raise capital. One of the key benefits of having limited liability status is that the owners' liability is limited to the amount they have invested in the company. This means that, in most cases, the personal assets of shareholders are safeguarded in the event of business debts or legal claims, providing an added layer of protection.

However, operating as a limited company does come with additional responsibilities and formalities. The company is required to prepare and submit annual financial accounts and reports to Companies House, the UK's registrar of companies. There is a need to adhere to company law, maintain statutory registers, and ensure compliance with various regulations. Additionally, taxation rules for limited companies are more rigid compared to sole traders, and the company's financial accounts are open to public inspection, reducing financial privacy.

As you explore which business structure aligns with your goals and vision, understanding the advantages and disadvantages of each is essential. In the full list that follows, we'll delve into the specific pros and cons for both sole trader and limited company, empowering you to make an informed decision that best suits your business aspirations and risk tolerance.

Read on to uncover the full range of considerations for each business structure. There’s also a list of questions you can download and ask yourself to help you decide which is the right structure for you.