Limited company or sole trader

Should you be a Limited Company or a Sole Trader?

Whether to trade as a limited company or sole trader is an important decision that shouldn’t be taken lightly, so be aware of the risks and benefits of each option.

Here’s an overview, but you must always seek advice from a qualified accountant before deciding what’s the best business structure for your business.

How to decide between being a limited company, a sole trader, or a partnership

All types of businesses can employ staff, and all are subject to the same rules on when you need to register for VAT so these won’t affect your decision.

Generally speaking, if you’re providing goods or services that someone can sue you over if things go wrong you should consider running as a Limited Company.

Some suppliers will only deal with Limited Companies so check with the ones you want to work with when making your decision.

You MUST seek advice from a qualified accountant before deciding which is the best option for your business.

Sole Traders

The simplest way to set up your business is as a sole trader.

The main advantages of setting up as a sole trader is you can get your business set and running quickly because it there’s no formal process to go through (except for any special licences or permissions you may need), and the on-going administration is a lot less than it is for other business structures.

See our list of 6 essential things you must do before starting your own business.

The main disadvantage for sole traders is that if things go wrong you have to pay any debts the business owes out of your own pocket.

Partnership businesses

There are two forms of partnership arrangement

  • A simple partnership, which work in a similar way to sole traders but with 2 or more people equally responsible for the business
  • A Limited Liability Partnership (LLP) which works a bit like a Limited Company with 2 or more people holding an equal number of shares

Limited Companies

The most complicated business structure to administer is a private Limited Company or a Limited Liability Partnership. For more information see our article how to set up and run a limited company

One of the main advantages of being a limited company is that your personal liability is limited to the amount of equity you put into the company.

One of the main disadvantages of being a Limited Company is the administration involved can be complicated and costly.  For example, you must file an Annual Return and annual Company Accounts at Companies House.  The company accounts need to be in a specific format which you’re almost certainly going to need an accountant to prepare for you.  Also, any changes to director or shareholder information must be documented on the right form, which is not always easy to locate or easy to understand.

Community Interest Companies

If you’re setting up a company for community benefit and not to make a private profit you can set up a community interest company (CIC).  Be warned though, there are strict rules for setting up and running a CIC to make sure the assets continue to be used appropriately.
See the CIC regulator website for more information on CIC companies.

Business Tax advice

Take a look at this range of books on business structure and tax outlining some of the different approaches you can take to managing your business tax.

Online limited company formation service

If you choose to set up as a limited company, use this online limited company formation service. You’ll usually be set up and ready to start trading within 3 hours.

Leave a Reply

Be the First to Comment!