October 21, 2022
When you set up your own business, one of the first decisions you will need to make is how to structure your business. The option of sole trader vs limited company is one that many business owners weigh up. So, what’s the difference? And what are the pros and cons of each? Let's explore further below...
Sole traders are self-employed business owners. If you’re a sole trader, there is no legal separation between you and your business - whilst you get to keep the profits, you’re also personally responsible for the liabilities.
Registering yourself as a sole trader is straightforward - you simply need to register with HMRC to complete a Self-Assessment tax return. This means you will pay Income Tax and National Insurance contributions at the end of the tax year.
Individuals will need to register if they earn more than £1000 from their self-employed business activities in a tax year - so, if that side hustle looks like it may be turning into something quite lucrative, this is a step you’ll need to take. You may also wish to register if you need to prove you’re self-employed for some reason (for example, to claim certain benefits) or if you wish to make voluntary class 2 national insurance payments.
Let’s take a look at some advantages and disadvantages of being a sole trader:
A limited company is a standalone legal entity, separate from you. You will be a shareholder (owner) and you may have other shareholders in the business who will own it alongside you. You may also act as a director, with control over the day-to-day running of the business, and you may do this alone or with others.
Limited companies are relatively straightforward and inexpensive to set up. There are some specific things you will need to think about and record in your articles of association (a document that sets out rules for running your company) when setting up, particularly if you will have other directors or shareholders, however, your solicitor will be able to chat you through these.
What will work best for your business will depend on your individual circumstances. Our team of expert solicitors have advised a range of businesses on how to structure themselves efficiently and effectively and can ensure you start off on the right foot. Find out how they can help here.