Sole Trader or Limited Company

July 15, 2022 by No Comments

If you are planning to start a business, the first thing that should come to mind is how you will run it. There are 2 ways of doing this: as a sole trader or a limited company.

Sole Trader

As a sole trader, you are the business owner and sole trader. You have unlimited liability, meaning that if your business can’t pay its debts, then you will be held personally responsible for paying them. You don’t need special permissions or qualifications to become a sole trader.

You must pay tax on your profits but can claim expenses against them instead of paying corporation tax as limited companies do.

To set up as a sole trader, you will likely do all of the accounting and bookkeeping yourself as there are no other shareholders who could help with these tasks. Though many do hire an accountant to do this for them.

Limited Company

A limited company, commonly known as an ‘Ltd’ company, is a legal entity. This means that it has its unique ID number and bank account. It also has its shareholders and directors.

The main advantage of having a limited company is that it can limit your personal liability in case you get sued for something you did while running your business. This could be anything from accidentally damaging someone’s property while working on their house or car to selling someone faulty goods that they used and broke down after only three months of use!

You have to weigh up what is best for your business.

Before making a decision, weighing the benefits and costs of each business model is important.

  • Sole trader: You are the only shareholder or owner. You are responsible for everything, so there is no limit on liability. If something goes wrong with your business, you could lose all of your personal assets (house, car, savings etc.).
  • Limited company: The company pays corporation tax on profits at 20% (small companies rate) and employees pay income tax at their individual rate. In addition, there is no limit on liability as the law protects shareholders against losses incurred by any creditor of an insolvent limited company in most circumstances, provided they have been paid their dividend up to the date when they become aware that their shares may be worthless

Conclusion

We hope this article has helped you to understand the differences between a sole trader and limited companies. If you are considering starting a business, it is important to make sure that you do so in the right way from the start. By choosing one of these two options over another, you could save yourself time and money down the line by allowing yourself access to certain tax breaks or giving yourself more financial control over your company.

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