Deciding between being a sole trader or running a limited company is crucial for any entrepreneur. Each structure has pros and cons, and the right choice depends on your business goals, income level, and long-term plans.
As accountants specialising in small to medium-sized businesses, we’ve helped countless entrepreneurs make this decision. Here’s a guide to help you weigh your options.
What Does It Mean to Be a Sole Trader?
This is the simplest way to start a business and is often ideal for those working alone or just starting out.
Advantages:
- Easy Setup: Registering as a sole trader with HMRC is quick and straightforward.
- Fewer Administrative Tasks: No need to file limited company accounts to HMRC and Companies House
- Direct Profit Access: You can access your profits more easily
Potential Drawbacks:
- Higher Personal Liability: You’re personally responsible for all debts and liabilities.
- Tax Efficiency: Sole traders pay income tax rates of 20%, 40% and 45% depending on the level of taxable earnings for the year.
- Perceived Credibility: Some clients and businesses may prefer dealing with a limited company.
What’s a Limited Company?
A limited company is a separate legal entity from you. It offers more structure and benefits but comes with additional responsibilities.
Advantages:
- Limited Liability: Your personal assets are protected if things go wrong.
- Tax Efficiency: Corporation tax rates are typically lower than personal income tax rates, and you can pay yourself through a combination of salary and dividends.
- Professional Image: A limited company often appears more established and credible to potential clients and partners.
- Growth Plans: A limited company is often better suited for scaling, hiring employees, or attracting investment.
Potential Drawbacks:
- More Administration: You’ll need to register with Companies House, file annual accounts, and comply with other legal obligations.
- Costs: Additional responsibilities often mean higher accountancy fees.
- Profit Restrictions: Money belongs to the company until it’s legally withdrawn as salary or dividends.
At SAS Micro, we specialise in guiding small businesses through decisions like these. Whether you’re a sole trader or thinking of incorporating, we’ll help you understand the financial and tax implications for your specific situation.
Let’s find the right structure to help your business thrive. Get in touch with us today for tailored advice!
