It can be difficult to make the decision to leave the standard professional path and create your own company. The ability to control your finances and the flexibility to choose your working hours motivates you, but there’s a lot to learn along the road. The first stumbling block appears even before you take the plunge. It’s critical to figure out how much time you want to work for yourself. Do you wish to start a business as a single trader or as a limited company? What are the distinctions between them?

Ownership is the most fundamental distinction between a solo trader and a limited business. A sole trader is the sole owner of their firm and has unlimited personal liability for its operations, whereas a limited company has several owners. In this article we take you through the key differences.

What is a sole trader?

A sole trader is a business owner who is entirely responsible for the operations of their company. Some people believe that registering as a sole trader requires you to operate as a one-person company, however this is not the case. As a sole trader, you can hire employees, but you own and control your company.

As a sole trader, you and your business are treated the same under current laws. This means that if your company suffers losses or incurs debts, you are personally liable. This is an important consideration when deciding whether to register as a sole proprietor or as a limited company. As a result, you get to keep all profits after taxes, which is a nice bonus. Many people who provide specialised services, such as plumbing, hairdressing, or copywriting, work as sole proprietors. Being a sole trader is also considered self-employed. This means that you employ and pay yourself – though you may hire and pay other employees if you so desire.

What are the benefits?

100% of the profits: Because you are the sole proprietor of your company, you will be entitled to keep all your after-tax profits unless you hire another employee.
You make the decisions: You’ll love the decision-making independence of being a solo trader if you respect your opinion considerably more than that of others. You’ll have complete control over your company’s operations, and you won’t have to go through anybody else’s approval process before implementing a new idea.

Disadvantages?

You have unlimited liability: The most major disadvantage of being a sole trader is that you are personally responsible for the debts of your company. This means that if you lose money, your assets, such as your home and car, may have to be auctioned to pay off your debt.
Limited expansion: Being the owner of a solo trading company implies you have managerial limits, which makes scaling difficult. You’ll also face capital limits, which means it’s doubtful that you’ll be able to raise the funds needed to develop your company enormously (although scaling isn’t impossible).

What is a limited company?

A private corporation with several owners, managers, members, or subscribers is referred to as a limited company. The owners of this form of company are legally separated. As a result, when you form a limited company (which must be done through Companies House in the UK), it becomes a different legal entity.

Benefits?

You can be more tax-efficient: Owners of limited companies can pay themselves in any way they like. Many limited-company owners receive a mix of dividends and salaries. The benefit is that dividends have a lower tax threshold, allowing you to be more tax efficient than if you merely paid yourself a wage.
Loses and debts aren’t personal: It is not your responsibility to cope with losses or debts incurred by your company. Your personal assets will be protected because all shareholders would be responsible for the debt.

Disadvantages?

You need to prepare annual accounts: You are responsible for preparing annual accounts for your limited company if you own one. Companies House must be notified of these accounts. A sole trader, on the other hand, is not required by law to file any of the accounts required of limited company owners.
More financial admin: On the other hand, having a limited corporation means you’ll have to deal with more financial paperwork. Making Tax Digital requires you to file a corporation tax return, annual accounts, and a confirmation statement, among other things. In addition, each director of a limited business is normally required to file their own self-assessment tax return.

If you have any other questions or queries at all, get in contact with us here at AWOC Accounting!