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Which Form of Business Registration is Better: Limited Company or Sole Trader/Self-employed?

One of the first decisions you will need to make as an entrepreneur is choosing the right legal structure for your business. Should you operate as a sole trader or form a limited company? This choice will have significant implications on how much control and liability you have, how you pay taxes, and how others perceive your business. Carefully weighing the pros and cons of each option based on your priorities and risk tolerance is critical.

 

With the right knowledge and advice, you can choose a legal structure that will support your goals now and in the years to come. This guide outlines the key differences between sole trader and limited company options to help you make the best choice for your business.

 

Registering as a Sole Trader: Simplicity and Control

Registering as a sole trader offers business owners simplicity and control. The sole trader has complete control, makes all the decisions and keeps all the profits of the business. There is minimal reporting required, typically only an annual self-assessment tax return. Bear in mind this does not exclude you from keeping relevant business records and managing your business finances in line with the key best practices mentioned here


To register as a sole trader, you simply need to inform HMRC and pay any tax due. You are not required to publicly file company accounts or annual returns. However, a sole trader has unlimited personal liability for any debts or losses incurred by the business. Meaning your personal assets may be at risk and can be used to pay off business debts if it ever came to it.

As a sole trader, your tax is charged on your profits (Income minus Expenses) in line with the prevailing personal tax rates usually 20% for anything between £12,571 - £50,270, 40% for anything between £50,271 and £150,000 and 45% for earnings over and above £150,001. The amount you keep as a sole trader business owner is simply the amount you have left after you have paid for your business expenses and tax.


Sole trader status is usually best suited to self-employed individuals and small business owners with low risk and few liabilities. It is also usually best for those who have no other source of income, or very small alternative income sources.

If your business grows substantially and you desire to take on full-time employees (not contractors and or freelancers), a limited company may be a better option to limit personal risk. 

For many entrepreneurs, registering as a sole trader is an easy first step to starting a business before transitioning to a limited company.



Forming a Limited Company: Protection and Credibility

Forming a limited company provides legal protection and credibility. If your business is registered as a limited company, it is essentially an entity/person of its own. Therefore your liability as the company owner is limited to the assets owned by the business. Any potential claims against the company would be against the company alone and would not be able to affect your personal assets.

 A limited company is also perceived as more credible and professional by customers, suppliers, and investors. The 'Ltd', ‘Limited’ or 'PLC' suffix strengthens your brand reputation and is likely to open up more opportunities for investment and growth. 

While forming a limited company may be more complex than operating as a sole trader, for some these benefits are more important and outweigh the additional administration burden and complexity. If limiting personal liability, attracting investment, and enhancing credibility are priorities, forming a limited company is likely the optimal path for your enterprise. 


With the right guidance, the incorporation process need not be too demanding, and you can gain the advantages of this business structure. 



Choosing the Right Type of Registration for your Business

To register your business as a sole trader or limited company in the UK, you will need to take the following steps:

The first step is deciding whether you want to operate as a sole trader or form a private limited company. 


Register as a Sole Trader / Self-Employed 

If you choose to be a sole trader, you simply need to register as self-employed with HM Revenue and Customs which can be done by yourself or an accountant using a simple online form.  You will then need to calculate and submit an annual self-assessment to pay any income tax and National Insurance contributions on your income for that year. This is submitted and paid to HMRC on the 31st of January each year for the previous financial year. 


Register a Limited Company

For a limited company, you must register the business with Companies House and submit formation documents like the Memorandum of Association. You will need to appoint directors, determine shareholdings, and file annual accounts. The company is taxed separately from the owners, who can draw a salary and dividends. There will also be a requirement to notify HMRC once the company starts trading so that you can begin submitting Corporation tax returns and making payments where necessary. Both structures require that you register for VAT if your taxable turnover exceeds the annual income threshold of £85,000. 


Other things to consider when registering your company:

You should also consider business insurance, trademarks, or patents to protect your intellectual property.

 

 

Advantages of a Limited Company Over a Sole Trader

Here are a few benefits that may make a limited company a better choice for your business. 


Limited Personal Liability

A limited company is a separate legal entity from its owners and directors. Your personal assets like your home, car, and savings are protected if the business struggles or fails. Creditors cannot pursue individual shareholders to recover company debts. This limited liability gives you more security and control over your finances.


Professional Image

A limited company projects a more professional image to clients, customers, and investors. The formal company structure builds credibility and trust in the business. This polished brand and reputation can help attract high-quality employees, partnerships, and growth opportunities.


Tax Efficiency

There are tax benefits to operating as a limited company. Profits and losses stay within the company, allowing more flexibility in tax planning. You can choose to take a lower salary and higher dividends, which are taxed at a lower rate. There are also more deductions and allowances available to limited companies. 



How An Accountant Can Help

An accountant can provide invaluable guidance as you determine whether to operate as a sole trader or limited company - and help you register for the preferred option. They can evaluate your specific situation and help you choose the right path for your business.


Accountants are experts in the legal and tax requirements for different business structures. They can advise you on the compliance and reporting responsibilities of sole traders versus limited companies to ensure you understand what will be expected of you under each option. This includes requirements related to tax returns, financial statements, and other filings.

 


Conclusion

As you've seen, there are compelling arguments for both operating as a sole trader and forming a limited company. The right type of business registration depends entirely on your priorities and risk tolerance. If control and simplicity are most important, a sole trader may be ideal. If limiting liability and credibility matter more, a limited company is probably the better option.

Whichever path you take, make sure to do thorough research and understand all responsibilities and implications fully before proceeding. 


Seeking expert advice? Beni Ratio Finances is committed to helping Company directors or business owners run financially successful businesses. Work with us. Let’s help you make sense of your numbers.

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