sole trader or limited company

Sole Trader or limited company: Which is the Best?

“Should I go for Sole Trader or limited company?” You might be looking for the answer, right! No worries. Like you, many people ask this question before a company formation. Though your choice depends on many factors like income, taxes, market trends, customers, and management, etc. In this blog, we’ll discuss the definition and pros & cons of both sides, letting you decide which one is the best for you. Let’s dive into it!


Sole Trader:

If you are yet to decide between the both. It’d be better to know what actually Sole trader is?

A sole trader is a person who’s self-employed, owing to the overall responsibilities of the business. You can also hire employees as a sole trader to expand your business. You need to register your business (sole trader) on the HMRC website. As a sole trader, you and your business are the same.

As a Sole Trader, you should register for Self-assessment and you are required to file self-assessment tax returns. Additionally, you need to pay income tax and NICs against your income.


Advantages of a Sole Trader:

In the UK, the sole traders comprise 59% of the total business community. Let’s find out the reason for this huge inclination towards it:

  • You don’t need to register as a corporation to companies house
  • You are exempted from registration charges
  • A sole trader has sole authority over the business
  • All profit is received by a sole trader
  • Cheaper to launch
  • Less accounting cost
  • No display of records

Disadvantages of a Sole Trader:

For making the right decision, you also need to consider its disadvantages:

  • The sole trader is responsible for all unlimited personal or business liabilities
  • Only a single person makes all business decisions
  • Challenging to increase capital
  • You are required to pay Income tax and National Insurance (NI)
  • Less credibility
  • Not tax-efficient as a limited company
  • No leave pay is granted

To know the best implications of a sole trader or limited company, you should be well aware of them both. Let’s discuss what a limited company is?


Limited Company:

A limited company is itself an entity, separate from the company’s owner, that is responsible for all its finances, debts, business decisions and contains a limited liability. A Limited company needs to be registered to companies house. It is owned by shareholders or guarantors. It’s more credible and authoritative than a sole proprietorship.

Directors own the responsibility of managing a limited company. A limited company is liable for corporation tax, annual tax returns and it should follow the guidelines of the Companies Act 2006. Though, there are more administrative responsibilities but is more tax-efficient than a sole trader.

Contact our accountants to find out the tax implications!


Advantages of a Limited Company:

Many people prefer limited company due to the following reasons:

  • It is separate from the owner
  • Contains limited liability that protects finances
  • More professional and credible
  • Appealing to clients/customers
  • Easy to get investors
  • The growth rate is higher
  • More tax-efficient
  • Shares can be sold
  • Directors receive dividends and salary

Disadvantages of a Limited Company:

For making the right decision, you can’t overlook its drawbacks:

  • Needs registration to companies house and HMRC
  • Expensive to establish
  • Information is displayed on public record
  • Needs more administration
  • Proper Accounting is needed
  • Difficult displace money

If you go for establishing a limited company, our limited company accountants are available for help!


Quick Wrap Up:

Hopefully, now you can decide whether sole Trader or limited company is best for you. Along with that, you need to analyze their registration process, tax implications, and insurance for both. Both have their own merits and demerits, now it’s up to you to decide the one that suits your need.

If you’re still confused to choose the ideal one for you, contact our customer support for expert advice.

Disclaimer: This blog is for your general understanding. Contact Cheap Accountants for expert advice.


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