New year – new business? Is your resolution for 2023 to stop being an employee and be your own boss? One of the first big decisions to be made when setting up a new business is the legal structure of your company – will you work as a sole trader or set up a limited company – and what is the difference anyway?
What is a sole trader?
A sole trader, also known as a sole proprietor, is a simple business structure in which one individual runs and owns the entire business. You can still hire staff but the sole trader and the business are considered one entity. As the owner, you retain all of the business profits. On the flip side, any debts and losses are the owner’s personal liability. As a sole trader, you are considered self-employed, so you employ yourself and pay yourself and your staff if you have any.
The benefits of being a sole trader are:
- You keep all the profits after tax
- You make all the decisions
- It’s the easiest way to set up a business
- There is less red tape in running your business
The downsides of being a sole trader are:
- You are 100% liable for your business – debts and all
- You have limited funding options
- There are fewer options to expand
What is a limited company?
This business is a private company that is legally separate from its owners and managers, of which there can be one or many. A limited company is registered at Companies House and as the director of the business you can be paid in a combination of dividends and salary which can in some cases be more tax-efficient. Directors have more limited liability for its debt and losses.
The benefits of a limited company are:
- It can be more tax-efficient as payment in dividends attract lower tax (but please do get specific advice on this)
- Debts and losses aren’t your personal responsibility
- It’s easier to leave
- They have more business credibility
The downsides of a limited company are:
- Annual accounts must be submitted to Companies House and can be seen by all
- The financial red tape (Making Tax Digital, Corporation Tax, etc.)
- Less freedom to make independent decisions
- Less easy to take money from the business
Which route should you take?
Now you know the difference between setting up as a sole trader and a limited company, you can take the route that suits you and your business. There are advantages and disadvantages to both options, but the main difference is all about liability. Service providers like hairdressers or copywriters tend to set up as sole traders, whereas a business with staff and premises with plans to expand, are more likely to choose the limited company option.
Can I change to a limited company from a sole trader?
Sole traders are not restricted to work alone forever. There may come a time when you want to expand, bring in new people, seek business funding and be more tax-efficient in how you’re paid. As with all business decisions, it’s worth talking through whether it’s the right move to switch to a limited company with an experienced accountant.
Why not contact the approachable and reliable experts at CRM on 01865 379272 to explore your next move when setting up or growing your business.