Setting up as a Company vs Sole Trader

3 months, 3 weeks ago by Oliver Atkinson

When starting a new business, one of the most important decisions you'll need to make is how to structure your business. The two most common options for many small business owners are to set up as a company or to operate as a sole trader. Each structure has its own advantages and disadvantages, and the choice you make can have significant implications for your business. In this article, we will explore the key differences between these two options.

Sole Trader:

A sole trader is the simplest business structure. It involves running your business as an individual without forming a separate legal entity. Here are some key points to consider when setting up as a sole trader:

• Simplicity: One of the primary advantages of being a sole trader is the simplicity of the setup. You don't need to register a company or deal with complex legal requirements. You can start your business almost immediately, which can be especially appealing for freelancers and small start-ups.
• Control: As a sole trader, you have complete control over your business. You make all the decisions and retain all the profits.
• Taxation: Sole traders report their business income on their personal tax return. This means that you'll pay income tax and national insurance contributions on your business profits. While this can be straightforward, it may also result in higher tax liability as your income grows.
• Liability: The downside of being a sole trader is that you have unlimited liability. This means your personal assets are at risk if your business incurs debts or legal issues. It's essential to have proper insurance to protect your personal assets.
• Scalability: Sole traders can face limitations when it comes to scalability. Growing your business may be more challenging, as you are essentially your business, and expanding might require you to change your business structure.

Limited Company:

Forming a limited company, results in a separate legal entity. Here are some considerations when opting for this business structure:

• Limited Liability: One of the most significant advantages of being a company director is limited liability. Your personal assets are generally protected from business debts and legal issues. This can provide peace of mind and protection for your personal finances.
• Tax Efficiency: Limited companies have more tax planning options. You can choose to take a combination of salary and dividends, which can be more tax-efficient than being a sole trader, especially as your income increases.
• Credibility: Having "Ltd" or "Limited" after your company name can add credibility to your business. It may make it easier to secure contracts with
• larger clients, as they often prefer working with established companies.
• Complexity: Forming a limited company involves more administrative work and legal obligations. You'll need to register with Companies House, maintain company records, and file annual accounts and tax returns. This can be more time-consuming and may require professional assistance.

For further information and advice that aligns with your business’s unique needs and goals, please contact us.