What is the difference between a Sole Trader and Limited Company?
What is a Sole Trader
A sole trader is registered with HMRC as a self-employed individual who runs their own business. As the business and individual are the same entity, there's no distinction between the two when it comes to assets & liabilities.
What is a Limited Company
A limited company is a legal entity registered with Companies House & HMRC and operates independently from the individual or individuals forming the business. The business will be responsible for its own assets & liabilities. The company will have shareholders who are the legal owners of the business.
The Benefits of Being a Sole Trader
Control: As a sole trader, you will have complete anonymity on how your business operates - as long as you remain within the remit of the law.
Simplified Accounting: While you won't have to file Annual Accounts with Companies House or a Corporation Tax Return, you will have to complete a Self-Assessment tax return to HMRC.
Privacy: A companies records are public domain and published on Companies House - meaning these documents can be viewed by just about anyone with an internet connection. The only exception to this is when filing micro or abbreviated accounts if your company is below the respective thresholds.
The Benefits of Being a Limited Company
'Clever' Accounting: While there is a greater amount and more complex accounting related to the running of a limited company, this also allows for clever accounting methods to offset losses and avoid taxation where possible to do so within the confines of the law.
Separate Entity: As the name suggests, a limited company limits the personal liability placed on the individuals running the business as directors and shareholders. For the most part, the business is responsible for its own financial assets and liabilities.
Personal Taxation: Clever accounting can also be applied to paying directors, using a combination of PAYE salary, dividends and business expenses can significantly reduce the taxation burden on the individual when receiving payments from their business.
How to Register as a Sole Trader
If you're thinking about starting up as a sole trader, you should undertake the following:
Choose a business name: Before you can register as a sole trader, you need to choose a business name. This name must be unique and not the same as any existing businesses.
Register for Self-Assessment: You need to register for Self-Assessment with HM Revenue & Customs. This will enable you to complete your tax return and declare any income and profits.
Set up a business bank account: To be able to manage your finances, you need to open a business bank account. This will help you keep track of income and expenditure.
Notify HMRC of your business: Once you are registered as a sole trader, you need to notify HM Revenue & Customs of your business. You can do this by completing a form called the ‘Income Tax Self-Assessment Registration’.
Get insurance: As a sole trader, you need to get the right insurance to protect your business. You will need to identify the correct insurance policies for your business, these may include public liability insurance, professional indemnity insurance and employer’s liability insurance.
How to Register as a Limited Company
As a start-up business you should undertake the following when starting life as a Limited Company:
Choose a company name: The first step in registering a limited company in the UK is to choose a unique company name. The name you choose must not be the same as any existing business. You can check the availability of a name by searching the Companies House register.
Choose a company structure: You need to decide on the type of company you want to register. You can choose from a Private Limited Company (LTD) or a Public Limited Company (PLC).
Register with Companies House: To register your company, you need to file certain documents with Companies House. These include a Memorandum of Association, Articles of Association and a Statement of Capital.
Appoint company directors: As part of the registration process, you need to appoint a minimum of one director. You can make this appointment yourself, or you can appoint someone else to act as a director.
Register for Corporation Tax: Once your company is registered, you need to register for Corporation Tax with HM Revenue & Customs. Corporation Tax is the tax paid on the profits of your business.
Set up a business bank account: Once you have registered your company, you need to open a business bank account. This will help you manage your finances and make it easier to pay taxes.
Get insurance: As a limited company, you need to get the right insurance to protect your business. You will need to identify the correct insurance policies for your business, these may include public liability insurance, professional indemnity insurance and employer’s liability insurance.
Thinking of starting a business, but not sure where to start... Get in touch today for a no-obligation chat.