When it comes to starting a business, choosing the right structure is one of the most important decisions you’ll make. Here, we will explain more about sole traders and limited companies, and point out the main differences.
What is a sole trader?
Sole transfer is a type of business. You can be a sole trader at the same time as you work for someone else, or you can just be a sole trader. Another word for sole traders can be self-employed. As a sole trader, you own and run your business as an individual. You are also responsible for every decision.
Does it sound exciting to be a sole trader? Check out our tips to become your own boss.
What is a limited company?
A limited company is counted as legally separate from its owners. It can have one or more owners, as well as shareholders and members. The people involved are only responsible for the company’s debts up to the amount they invested.
Even if a limited company has just one owner, like a sole trader, the law still sees the owner and the company as two separate entities.
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What’s the difference between a sole trader and a company?
When deciding whether to operate as a sole trader or form a company, it’s important to understand the key differences between these two business structures. Each option comes with its own set of advantages and challenges, affecting everything from legal liabilities and taxation to management and funding. Here are the main differences between the two:
Legal structure
A sole trader owns and operates the business on their own. The business and the owner are considered the same legal entity, which means the owner is personally liable for all business debts and legal actions.
In contrast, a company is a separate legal entity from its proprietors. This separation allows the company to own property, sue, and be sued in its name. The owners, also known as shareholders, and members have limited liability based on their investment in the company.
Liability
A sole trader has unlimited liability, meaning the owner’s personal assets can be used to pay off business debts. In contrast, the liability of the owners in a company is limited to their investment in the company, typically protecting their personal assets.
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Taxes
For a sole trader, income from the business is treated as personal income, and the owner pays personal income tax on the profits. A Limited company, on the other hand, pays corporate tax on its profits, and owners (shareholders) may also pay personal income tax on dividends received from the company.
Cost
For a sole trader, it is usually cheaper to set up and operate due to less regulatory compliance and fewer filing requirements. In contrast, a company has higher setup and running costs because of regulatory compliance, audits, and administrative requirements.
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For a sole trader, funding is usually limited to personal savings, loans, or small business grants, making it more challenging to attract investors. In contrast, a company can raise capital by issuing shares to investors, making it easier to attract investors due to the limited liability and formal structure.
Management and control
A sole trader has full control over all business decisions. In contrast, a company’s management and control are typically exercised by a board of directors, and decisions may require approval from shareholders during annual general meetings.
Which one is the best for me — sole trader or limited company?
Choosing between operating as a sole trader or forming a limited company is one of the most important decisions you’ll make as an entrepreneur. Each structure has its unique benefits and drawbacks. The best choice for you depends on your specific circumstances, business goals, and personal preferences.
As a sole trader, you have complete control over all business decisions, and the setup process is generally simpler and less expensive. This structure is ideal if you prefer minimal administrative duties and want to start small, leveraging personal savings, loans, or small business grants for funding. However, being a sole trader also means you have unlimited liability, putting your personal assets at risk if the business incurs debts or faces legal issues. Additionally, attracting investors may be more challenging due to the less formal business structure.
Read also: 10 reasons why you need a business plan
On the other hand, a limited company offers the advantage of limited liability, meaning your personal assets are typically protected against business debts and liabilities. This structure is more attractive to investors, as it allows you to raise capital by issuing shares. While the setup and ongoing compliance costs are higher, and the administrative burden is more significant, a limited company can provide a more robust framework for growth and scalability. Companies also pay corporate tax on profits, which may be more tax-efficient depending on your income level and business earnings.
The best choice depends on your long-term vision, your tolerance for risk, and your willingness to handle administrative responsibilities. Want to be more prepared before diving into starting a business? Here are 10 things you need to do before you start a business.
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