Limited company or sole trader – part 2

Wednesday, 15 June 2011 12:48

Written by Super User

Category: Start-up advice

Onwards to part two of which is best: limited company or sole trader for small business start-ups.  The first part of this story looked at the benefits of sole trader status for small business start-ups, this time we’ll have a look at the benefits (and drawbacks) of limited company status.

For those that don’t know, a limited company is essentially a new legal entity that is created when the company is registered with companies house.  It means that unlike sole traders, the company exists in its own right – the owners can change, the name can change and so can many other things while the bit underneath remains the same.  It’s fair to say that many of the good bits about going down the limited company route are the opposites of the bad things about being a sole trader (if that makes sense!!).  So, to get started:

The benefits of limited company status for small businesses

The company is a ‘legal entity’, not you as a person.  This means that in most cases, should things go wrong, it’s not you as a person who would be prosecuted or sued (although this is sometimes the case!!) and it also means that the officers (directors) have ‘limited liability’ to the company (hence the name) and can’t have their personal belongings taken to pay off company debts.

The tax payable is by the company on profits made, therefore it’s always at the corporation tax level (currently 21%) and has nothing to do with personal allowances i.e. as a sole trader, if you generate more than £36,000 in profit (or there abouts) you would pay at the higher tax rate above that level, as a limited company, it’s always 21% – you can also choose when to take profits from the company to suit your own taxation issues. 

Many larger companies will only deal with limited companies not sole traders – you could be prevented from tendering for work as a sole trader.  It’s also generally easier to insure a limited company than a sole trader.

The drawbacks of limited company registration.

There’s always bad to go with the good – the main one being the additional paperwork involved.  Each year a limited company has to make returns to Companies House based on thier accounts, which are also more complicated and will almost certainly need to be prepared by an accountant.

Everyone can see your company accounts – if you want to see how well or badly a company is doing, for a small charge you can get copies of the accounts submitted to companies house.

In the early days of your limited company, lenders will often want the directors to cover any lending with their own assets – therefore your house might be just as at risk as going down the sole trader route.

Making the right choice

To be honest, two articles aren’t nearly enough space to go into this in detail.  There are many drawbacks and benefits of both approaches, but I’ll try to summarise.

Limited company – a bit more hassle to set up and more records need to be kept.  Does give protection if everything goes badly wrong and can open up a wider customer base (people trust ‘real’ companies).  Can have significant financial benefits if done properly.

Sole trader – easy to set up, more simplified accounts and records required.  Can cause big problems if it all goes wrong – everything you own can be used to pay of debts.  Sometimes seen as a ‘here today, gone tomorrow’ organisation.

Basically, there’s no right or wrong answer.  Whether to go sole trader or limited company for a new business depends on many factors:  the business sector; anticipated size of business; will you be hiring staff, etc.  The best advice we can give is to get advice from an experienced small business start-ups company.