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What is Sole Trader?When a business is run as a sole trader, it means that there’s one self-employed individual who controls and owns the business. This allows the self-employed individual and the business to be essentially the same thing because the business does not have it’s own identity legally.
Any profit made by business legally belongs to the self-employed person. They do not need to seek permission to withdraw money from the business. However, because the business and the individual are practically the same thing, any debt will be the responsibility of the self-employed individual, who will be liable for paying this off. As a result of this, sole traders need to be aware that their personal finances, assets and possessions could be at risk if they are unable to pay business debts. This could possibly result in personal bankruptcy.
Overall, it has both negative and positive outcomes, depending on how well the self-employed individual manages their finances. Being a sole trader means you have to be organised and cautious with expenses.
What is a Limited Company?When a business is run as a limited company, it exists as a legal entity in its own right and is owned by shareholders. The company can be managed by a singular director or multiple directors. There can also be a sole shareholder, of which can also be the director. This will allow them to choose whether to own and run the business alone or alongside other people.
Because the business is its own entity as a limited company, itself is liable for its own debts. The finances and liabilities of the business are entirely separate from those of the company’s directors and shareholders. This means that company owners cannot be held liable for the business.
Overall, no matter what financial state the business is in, the shareholders/directors will have all their personal assets and finances protected should the business get into trouble.
Sole Trader vs Limited CompanyNow that we understand key differences in ownership and liability, we must establish the other differences that play an important role in the decision making.
When being a sole trader, it’s important to note that you must file an annual self- assessment form to declare profits, pay income tax and National Insurance contributions.
When being a limited company, directors are employed by the business and receive a salary. Income tax and National Insurance Contributions are paid through PAYE. This business will also pay Corporation Tax.
As a result of these factors, many people may find that the limited coman is a more tax efficient way to run a business. Corporation tax is a flat line of 19%, whilst Income Tax paid by sole traders is 20% - 45% depending on the income.
What should you choose?Hopefully, with the clear differences given, you should be able to decide which is best for you; however, if you’re still unsure what to choose after this article, you can always seek advice from our experienced team.