Making the decision between operating as a sole trader or forming a limited company is a pivotal moment that is likely to determine how a business operates in the future. Both business structures have advantages and disadvantage, meaning choosing the right option is often different for individual business. The key features of both structures, as well as the strengths and drawbacks of each, are set out below.
Sole Trader
A sole trader is a self-employed person who owns and runs their business as an individual. The business does not have a different legal entity to its owner. Sole Trader - Pro's
Quick and easy to set up
Generally less ongoing admin
Simpler tax structure
Fewer return responsibilities
Sole Trader - Con's
Unlimited personal liability to business debts
Higher potential tax rates
Less flexibility when Tax Planning
Can be harder to raise business finance
Can be viewed as less superior to a Limited Company
Limited Company
A Limited company (LTD) is a separate legal entity from its owners, and can consist of one, or multiple owners and shareholders. The liability of business debts is limited to the owners personal holding within the company.
Limited Company - Pro's
Owners personal liability is limited to the value of their holding
Tax rates are relatively lower
More options available when Tax planning
Can be easier to raise business finance
Can be viewed as superior to a Sole Trader
Limited Company - Con's
More difficult process to set up
Greater reporting responsibilities
Can lead to greater admin
Higher start up and ongoing costs
From the detail above you will see that there are many variables to consider when choosing which structure is right for your business, and it is suggested that you discuss all of these variables and your circumstances with you accountant.
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