If you’re considering setting up a new business in the UK, the two most popular options are the sole trader structure and a private limited company. The sole trader option is more suitable for startups and very small businesses which are owned and operated by just one person, whereas a limited company is ideal for all types and sizes of businesses with one or more owners, including startups, existing sole proprietors and established organisations.
There are advantages and disadvantages to both legal structures, so it’s important to familiarise yourself with their features and requirements to determine which one will best serve your needs. In this article, we will take a brief look at the most significant qualities, benefits and drawbacks of the sole trader and limited company frameworks to provide you with a concise understanding of each one. However, a professional advisor should always be consulted prior to making a decision.
The sole trader structure is one in which a sole person sets up in business as self employed and trades as an individual. It is suitable for almost any type of commercial business but it cannot be used for partnership ventures. You can employ people to work for you, but you alone will be the sole owner of the business. This means you will be personally responsibility for any and all debts or liabilities that may arise. You will also be required to file your own tax returns and pay income tax on your profits.
To register as a sole trader, you simply have to provide a few details to Her Majesty’s Revenue and Customs (HMRC) and register for Self-Assessment. This can be done online and it’s incredible easy to do, but you will require a National Insurance Number. For this reason, it is not a viable option for non-UK residents – you can only obtain one if you have the right to work or study in the UK.
- Quick, free and simple online registration process.
- No annual administration or maintenance charges.
- Sole trader details remain confidential.
- You are the only owner of the business.
- Can start trading before registering as self-employed.
- No accounts to file.
- Minimal reporting and record-keeping requirements.
- You pay income tax on profits.
- You are the business, so all profits are yours to keep and withdraw whenever you wish.
- Trading losses can be offset against other forms of personal income.
- Easy to stop being a sole trader.
- Tax relief can be obtained on most business-related expenses.
- Easy to make changes to the business.
- Unsuitable for non-UK residents.
- Unsuitable for setting up a business with other people.
- Unlimited personal liability for business debts.
- You are the business, so you can be sued personally for any legal wrongdoing.
- Your business name is not protected.
- Not tax-efficient if you are a higher-rate tax payer.
- More challenging to obtain finance and investment.
- Not as highly regarded as the limited company structure, so you may lack competitive advantage when bidding for contracts, attracting new clients or trying to expand the business.
- Cannot be used for non-profit or charitable purposes.
A UK limited company (‘LTD’) is a legal entity that is separate from the people who own and manage it, so it is completely different to the sole trader structure, in which the business and the owner are one. The equivalent to a UK limited company in the US is a corporation (Inc.), so this may help you gain a better understanding.
With a limited company, you can own and run the business alone, you can own and manage it with other people, you can own the company and appoint other people to run it for you, and you can hire employees to work for the business, too. There are so many options, which is why it is such a popular choice for many individuals and groups of people.
- The business is a legal ‘individual’ in its own right.
- Shareholders and directors are only liable for what they invest in the company or guarantee to pay in the event of insolvency, provided the business operates within the law.
- You can own the whole company or a portion of the company.
- You can set up a company on your own or with business partners.
- Directors can be appointed to run the business on your behalf.
- Opportunity to employ tax-saving strategies and take tax-efficient personal remuneration.
- Company name is protected, which means no one else is permitted to register a company in the same name.
- Shares can be sold to raise investment capital.
- Easier to acquire funding.
- Incorporation can create the impression that your business is larger than it actually is.
- Enhanced professional status, both for the business and the people who own it.
- More trusted and credible than sole trader structure.
- Ideal structure if you’re hoping to bid for high-value contracts or will be carrying out high-risk business activities that could lead to liability claims.
- You can sell the entire business or your shares in the company to someone else.
- Suitable for non-UK residents.
- Company pays only 20% Corporation Tax on yearly profits up to £300,000.
- Suitable for non-profit and charitable organisations, as well as profit-making ventures.
- Can be set up as dormant for the sole purpose of protecting a company name.
- Must complete an incorporation application for Companies House. A fee applies.
- A registered office address must be munitioned in the country of incorporation.
- Accounting requirements can be complex and time-consuming.
- Strict record-keeping, filing and reporting requirements must be adhered to at all times.
- Must report to both Companies House and HMRC.
- Company details, as well as information about directors and shareholders, are disclosed on public record.
- Public can inspect your statutory records.
- Can be time-consuming to dissolve a company
- Unsuitable for anyone under the age of 16, or any person who is an undischarged bankrupt or disqualified director.
- Risk of financial and legal penalties if statutory requirements are not followed.
- Cannot offset trading losses against your personal income
- Strict procedures must be followed to remove money from the company for personal use.
To set up a limited company in the UK, either as a first-time venture or as an extension of an existing business, you must apply to the UK registrar of companies (Companies House). Applications can be made online through the Companies House website or via an authorised company formation agent – there is no requirement to travel to the UK to sign anything or provide ID in person. Most registrations are approved within a matter of hours, so you won’t have to wait very long for a decision.