Sole Trader
vs Ltd Companies

Help & advice for Businesses

Fusion Knowledge
Comparison sole trader ltd companies

Sole Trader vs Limited Companies for Start-Ups

We have compiled a simply comparison below to help decide between choosing the right Business Structure for YOUR business.
This is not a comprehensive list and we strongly advice that you seek additional professional advice before making your final decision.
It is important to understand clearly the differences between trading as a Sole Trader or through a Limited Company.

Legal Difference


Sole Trader / PartnershipLimited Company
YOU are the businessThe business (Ltd Co) is a separate legal entity
This is probably one of the main disadvantages of being a Sole Trader, as you are personally liable for any consequences of business failure.The liability is ‘Limited’ to the Capital invested by you as the shareholder
The risk could be mitigated (though may not be completely removed) through Public Liability Insurance.It is important to note however that although it is extremely rare that the Director of the Limited Company to be personally liable, there are exceptions such as:
Fraudulent Trading (court may declare that the directors or others who were knowingly parties to the fraud are liable for some or all the debts and other liabilities)
Wrongful Trading (continue to trade when they know, or should know, that the company cannot meet its debts)

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Accounting & Tax implications

Taxes on earnings


Sole Trader / PartnershipLimited Company
You payThe taxes you pay depend on how you choose to extract the funds. If planned correctly then you can save much more than a Sole Trader on your overall taxes.
Income TaxCorporation Tax on taxable profits. This is much lower than Income Tax rates
Class 2 & 4 National Insurance on the taxable profits of the business.Where funds are extracted through salaries these attract:
Income Tax
Employee & Employer National Insurance Contributions
Shareholders would be subject to Income Tax on Dividends
It is important to note any that where IR35 and Managed Service Company rules apply, the company will deduct Income Tax (PAYE) & NIC on its income rather than as dividends

Accounting & Record Keeping


Sole Trader / PartnershipLimited Company
Can offset against Personal IncomeCan only be offset against Company profits
This is quite a big difference, since, if you have other earnings and expect to make significant losses in initial year of trading, it may be more tax efficient to start trading as a Sole Trader firstSince the Company and you are separate entities, any losses incurred in the company can only be offset against income from the Company

Audit


Sole Trader / PartnershipLimited Company
No Audit is requiredAudit thresholds apply
A Limited Company requires to have an audit if 2 of the three conditions below apply:
Annual Turnover of more than £10.2 million
Assets worth no more than £5.1 million
50 or fewer employees on average
Since the Company and you are separate entities, any losses incurred in the company can only be offset against income from the Company

Other Considerations

Prestige


Sole Trader / PartnershipLimited Company
May be portrayed as a small companyGives impression of a sound organisation
This may mean it is more difficult to get larger jobs. Larger organisations may be less willing to work with small businesses with one staffThough this does guarantee reliability, a Limited Company gives the impression of a more credible Business than a Sole Trader
In certain sectors, contractors or agencies may be less willing to work with Sole Traders due to lack of legal protection that a Limited company provides

Borrowing


Sole Trader / PartnershipLimited Company
Borrow from bank personallyThe company can borrow on its own name
Bank can usually take security by mean of a ‘fixed or floating charge’ over the assets of the Limited Company

Pension


Sole Trader / PartnershipLimited Company
Can only have Personal PensionHave option of Personal or Company Pension Schemes

Death


Sole Trader / PartnershipLimited Company
When you die, the business ceasesLives on
Since you are the business are the same, the business ceases to exist upon the death of the Sole TradesThe company is a separate legal entity and can continue to operate after death of owner

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