When running a business, you need to consider whether you want to set up as a sole trader or as a limited company. Your choice will have different legal implications and can impact the organisation of the business. You may also find that access to capital and funding will be very different for a sole trader compared to a limited company.
For example, a sole trader may be able to get smaller short term loans, whereas a company will need to go down more formal funding routes or seek out the right business loan for their needs.
What is the difference between a sole trader and a limited company?
The key difference between a sole trader and a limited company is regarding ownership and liability. When you set up as a sole trader, the company is owned and controlled by one person. With this full control also comes unlimited personal liability for the business.
If you set up your business as a limited company, the ownership is split into equal shares and any shareholders will split the responsibility and liability of the company. This means that any shareholders only have limited liability for the business and, subsequently, less personal financial risk.
What is a sole trader?
If you choose to set up your business as a sole trader, you are taking full personal responsibility for the business. This does not mean that you need to run everything alone; you can still employ other people to help you with your business operations, but you will be responsible for controlling the business.
In legal terms, this also means that you as an individual and your business are one and the same. Thus, if your business suffers any losses or debts, you are personally liable.
What are the advantages and disadvantages of being a sole trader?
If you are a sole trader, you are able to keep all of your business’ profits without needing to split them with any other shareholders.
For a small business with low risk and no need to employ other people, practising as a sole trader might be the most profitable option. Additionally, sole traders will of course not be responsible for employee requirements like employee medicals or otherwise, as they will have limited responsibility for anyone within their professional structure.
Many business owners who offer a specialist service, such as electricians or hairdressers, may choose to run their business as a sole trader.
However, if you run your business as a sole trader it means that you are taking full responsibility for the company. This means that you are fully liable for any loss that the business makes; if this is the case, you may need to put down your personal assets in order to repay any debt or compensate for losses.
Another potential disadvantage of running your business as a sole trader is that you are completely responsible for any important business decisions and have to take full accountability for the successes, and failures, of the business.
What does it mean to be a limited company?
If you run your business as a limited company, it involves setting up a private organisation from which to run your business operations.
From a legal perspective, the business will be a separate entity meaning that your personal finances and your business finances will be kept separate. As the director of a limited company, you will have limited liability; this means that you will be partially responsible for any losses or debts incurred by the business.
What are the advantages and disadvantages of running your business as a limited company?
There are certain benefits to running your business as a limited company. For example, you are responsible for paying yourself, meaning that you can pay yourself in a combination of salary and company dividends. This can work out to be far more tax-efficient because dividends have a lower tax threshold than salaried pay.
One of the key benefits to running your business as a limited company is that you are mitigating some of the liability; all shareholders have a limited liability if your business suffers losses or debt meaning that you are not personally responsible.
However, having a limited company can often be more difficult from an administrative point of view and there are often more complex tax requirements to consider.