The two most popular business structures in the UK are Limited Companies and Sole Traders. In this post we’re going to look at the two and highlight some of the pros and cons of each.
Limited Company (Private Company Limited By Shares)
A limited company is owned by shareholders (also known as members) and run by directors. An individual can act as a shareholder and director – therefore making it possible to form a company with just one person.
By running as a limited company, the business owner is separating their own finances from the companies. Profit can then be given in a number of ways.
Limited Company Pros
- Limited Companies provide financial protection to their owners. If a company were to go bust, shareholders only need to pay for any unpaid shares in the company.
- There is a level of ‘officialness’ and credibility associated with Limited Companies. In fact some businesses (and people) stipulate that they’ll only work with Limited Companies.
Limited Company Cons
- Running as a Limited Company comes with more filing rules and regulations when compared to a Sole Trader. These include filing Annual Returns (a snapshot of general information) and Annual Accounts (financial information) with Companies House on a yearly basis and filing Company Tax Returns with HMRC on a yearly basis.
- Limited Companies are required to pay Corporation Tax on profits.
Running as a Sole Trader means that the owner can keep all profits once tax has been paid. It does not mean that the owner must work alone.
Sole Trader Pros
- When compared with a Limited Company, the tax and filing regulations are minor.
- Sole Trader information (such as the owner’s information) is kept private whereas Limited Company information is publically available.
Sole Trader Cons
- A Sole Trader structure does not provide limited liability like a Limited Company does. If the business were to go bust, the individual involved would be responsible for any losses.
- Sole Traders may struggle to grow as gaining finance is harder.
Tax Implications for Limited Companies and Sole Traders
These differ depending on circumstance. For more information on the tax implications we recommend that you watch this webinar: Which Company Structure is Right For Me?
If you’ve made a decision and are ready to #ChangeYourLife and start a business, take a look at the below links to get started:
Set up as a Limited Company
Set up as a Sole Trader