If you’re planning on starting your very own business, you’ll come across an early dilemma: should you run your business as a sole trader or limited company?

There are a lot of differences between these two very common business structures, as well as different advantages and disadvantages.

In this blog, we’ll go through everything you need to know so you can make the right decision for yourself and business.

Difference between sole traders and limited companies

The main difference between sole traders and limited companies can be discerned from their names.

First, a sole trader is solely responsible for the business that they run.

Under this business structure, there is no legal difference between the sole trader and the business. That means that whatever the business earns, you earn. What it owns, you own. And whatever the business owes to creditors, you owe as well.

This wouldn’t be the case if you ran a limited liability company. Instead, as per the name of the structure, you would enjoy limited liability from the company, including its debts, assets and earnings.

That’s because you, as the company owner, and the company itself, are legally separate from one another.

Sole trader: pros and cons

Being a sole trader is one of the simplest ways to run a business, as there is far less administrative work involved than for limited companies to deal with.

For instance, there’s less paperwork, fewer registrations and you’ll only have one tax return to do each financial year – a self-assessment tax return for income tax. You will undoubtedly save time and money, too.

However, because your profits will be taxed through income tax, it does mean that you may end up coughing up more in tax than a company director – especially if you’re doing well and are in the upper tax bracket.

Moreover, as we discussed earlier, your assets might be on the line if you’re a sole trader, including your own home, if you can’t pay your creditors

Limited company: pros and cons

This risk to your personal assets does not exist if you run a limited company, because of the limited liability you enjoy from the company. 

Running a company also offers a more lenient tax treatment that may allow you to keep more of your hard earned cash. It’s a bit complicated, though, so we’ll explain how it works.

First, your company’s profit will be taxed at a flat rate of 19% in corporation tax, as opposed to the 20%, 40% and 45% a sole trader may pay on different portions of their profits.

While your personal income will also be taxed if you withdraw it from your company as a regular salary, there are some ways to keep the bill down.

You can do this by keeping your salary below £9,100 (the secondary threshold for National Insurance), which will see you liable for no income tax or National Insurance contributions.

You can then top up your payments with dividends, which are taxed at a much lower rate than income tax.

However, running a limited company comes with extra responsibilities, including registration with Companies House, submission of corporation tax returns and maintenance of statutory records. 

Which business structure should you choose?

Still not sure which business structure to choose? 

If you’re looking for a quick answer online, unfortunately you’re not going to get it from a blog. After all, which structure you will benefit from the most is highly dependent on your very unique situation.

So, make sure to reach out to our team for a definitive answer, even if our overview has given you an idea of which suits you – you should always talk to an accountant before you change your business structure.

Talk to us about your business’s legal structure.