If you’re looking to start your own business, it’s important to know what the difference is between being a sole trader and a limited company. In this article, we’ll explore the pros and cons of both options so that you can decide if they’re right for you.
What’s the difference between a sole trader and a limited company?
A sole trader is a business run by one person. You do all the work yourself, and you’re personally responsible for any of your actions. That makes it very easy to get things wrong, which can be dangerous if you don’t pay enough attention to what you’re doing.
A limited company is a separate legal entity that has its own name and bank account, separate from its shareholders’ personal funds (although they may still be able to borrow money from each other). Limited companies are subject to corporation tax — this means that profits will go into the company rather than directly back into your pocket as dividends or salary payments would normally do — but also income tax on profits as normal (with some exceptions).
Is it better to be a sole trader or a limited company?
The main advantage of being a sole trader is that it’s flexible. You can set up your business as you want, and pay yourself whatever salary you want. This means that if you’re self-employed and don’t have any employees, then setting up a limited company would be more complex than simply registering as an individual in the first place.
As we’ve already seen above, limited companies have more overhead costs associated with them than sole traders do, this includes accounting fees and legal fees (to protect against litigation). So if your goal is to save money on tax bills then operating from home as a sole trader might be better for you than using one of these other options.
Advantages of being a sole trader
When you are a sole trader, you can work for yourself. You do not have to work at the same place every day and you can choose your own hours. If there is an emergency and your business needs more staff, then it’s not an issue as long as you are able to pay them yourself.
It may be easier for some people who want more freedom and flexibility in their lives to become self-employed than it would be for someone who wants less freedom or does not like change at all!
You don’t need any experience or qualifications (though this may help) — but if anything goes wrong with the business then there’s no one else responsible but yourself so make sure that everything runs smoothly before taking on too much workload!
Disadvantages of being a sole trader
- No salary. In a traditional workplace, you’ll be paid a fixed amount of money each month (or week). As a sole trader, however, your income will depend on how much work you do and what type of business you run — meaning that even if it’s busy one day and slow another, there won’t be any guarantee that your paychecks will match up with those at a regular job.
- No holiday pay. Some companies provide paid holidays for their employees but because freelancers aren’t guaranteed contracts or sick days in this scenario, they’re not entitled to any annual leave either! This can be especially problematic if someone wants time off from work during periods such as maternity leave or paternity leave where they’d normally receive full payouts from their employer’s policies instead.”
Advantages of being a limited company
Limited companies offer several advantages over sole traders. They can be set up in as little as three days and have the benefit of being registered with Companies House, which means that you are less likely to have issues with your accounts or tax liabilities.
Limited companies also benefit from group accounts, which means that all employees share the same company account and receive their wages directly into this account; they cannot pay themselves individually. This makes it easier for employers who want to pay salaries at the end of each month or week rather than as a lump sum on payday.
Since there are no shareholders involved in running a limited company, any business profits made will go directly into the operating bank account (or if cash is paid out via cheque then this money goes straight back into your personal pocket). This can be useful when trying to raise finance from lenders because they don’t know what other assets such as property portfolio etcetera might be worth when calculating interest rates!
Disadvantages of being a limited company
Limited companies are not guaranteed to be limited. If the company has liabilities, it can be sued by its creditors and shareholders.
Limited companies also need to file accounts and pay corporation tax. These costs can add up quickly if your business is growing quickly, especially if you don’t have any experience in accounting or finance.
Limited companies also cannot issue shares at their own discretion because they must follow certain rules set out by law (for example Directors may only sell their own shares).
Can I change from being a sole trader to a limited company?
Yes, you can change from being a sole trader to a limited company. Because there are a lot of reasons why people would want to change their status from being a sole trader to a limited company like its boosts your business’ reputation and helps raise business funding.
For example, if you are looking for funding then it is vital that you apply for incorporation. With incorporation, you can access all the benefits that come with having an incorporated business such as:
- Tax efficient structure that allows businesses with small turnovers but large profits (or vice versa) and large companies to pay more tax than smaller ones.
- Legal protection against creditors — if someone makes an unsuccessful claim on your assets then they will have no right over them unless they go through court proceedings first — which could cost thousands!
Conclusion
The bottom line is that you need to weigh up the advantages and disadvantages of being a sole trader or a limited company before deciding which one is right for you.
If your business isn’t making money yet, then it may be worth investing in becoming a limited company so that you can protect yourself from any future debts or legal issues.
On the other hand, if you have good capital reserves and your business is profitable then there’s no reason why not being an employee shouldn’t work out well too!
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