When it comes to starting a business, choosing the right structure is one of the most important decisions you’ll make. Here, we’ll explain the differences between setting up as a sole trader vs limited company.
What is a sole trader?
A sole trader, also called a sole proprietor or sole proprietorship is a type of business structure where one person owns and runs the company. You get to keep all the profits, but you’re also liable for any losses. Becoming a sole trader it’s one of the easiest way to start a business.
Another word for sole-trader is self-employed, contractor or freelancer. But not all contractors or freelancers set up their own business.
Excited to be a sole trader? Check out our tips to become your own boss.
What is a limited company?
A limited company is a legal entity apart from its owners. It can have one or more owners, as well as shareholders. The people involved are only responsible for the company’s debts up to the amount they invested. There are usually more hoops to jump through to set up a limited company.
Even if a limited company has just one owner, the law still considers the owner and the company as two separate entities.
What’s the difference between sole trader vs limited company?
When deciding whether to operate as a sole trader or to set up a limited company, it’s important to understand the key differences. There are pros and cons for both.
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 owner. This separation allows the company to own property, sue, and be sued. 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, which protects their personal assets.
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
It’s usually cheaper to set up as a sole trader vs a limited company, there are fewer regulations and filing requirements. In contrast, a company has a more complicated and expensive setup 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.
Want to make an idea into a business? Here’s how you can do it.
Which one is the best for me? Sole trader vs 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 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 less administrative duties and want to start small, leveraging personal savings, loans, or small business grants to get started. 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.
See also: 10 reasons why you need a business plan
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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