When you set up a new business, you will need to make an important decision about its legal structure, as to whether you choose to become a sole trader or a limited company. It can be difficult to get your head around the options available to you, but understanding what each one means is a good starting point. There will be both advantages and disadvantages to each model depending on your specific business.

A sole trader is a self-employed person who owns their business outright. This is the simplest kind of business structure because the owner and the company are considered one legal entity.

A limited company, on the other hand, has its own legal identity, separate from its owners and directors. It can consist of one or multiple owners, who have limited responsibility for business liabilities.

The advantages of becoming a sole trader include the fact that the business is easy to set up because you do not need to register it. You therefore have greater privacy because your details cannot be found on Companies House. There is also relatively little paperwork, other than having to complete an annual Self-Assessment tax form. However, sole traders have unlimited liability, so if the business experiences financial problems, the business owner is held personally liable. Tax rates on sole traders can also be more stringent, so it may be worth considering changing to a limited company when your business grows.

Operating as a limited company has its benefits because the business is legally separate from its owner(s), so personal assets are protected. Limited companies tend to be more tax-efficient because they pay corporation tax, as opposed to income tax, on their profits. There’s also a wider range of allowances and tax-deductible costs that a limited company can claim against its profits. On the downside, limited companies have legal responsibilities that the company director must acknowledge. Information about the business can be found on Companies House, and you have to pay a fee to register as a limited company. You may be inclined to hire an accountant to help with the additional paperwork requirements such as your annual report and tax return.
The main differences between a sole trader and a limited company are therefore around the amount of tax you are expected to pay, plus how much liability you have over your business. As far as the former is concerned, you can save on your tax bill by choosing the most suitable business structure for you.

For sole traders, all profits are kept after tax and you can apply for certain tax reliefs that are unavailable to limited companies. You may also qualify for a trading allowance that means you to claim up to £1,000 per tax year to use against any self-employment income. However, a limited company structure is often the preference of larger businesses with multiple owners because it allows them to share control over the business. A sole trader must pay income tax on profits, whether or not they are used personally, but with a limited company, any profits belong to the business, as opposed to the owner(s).

When choosing the legal structure for your new company, the key considerations include whether your business is high-risk in terms of potential liability, as well as the amount of profit you can expect to turn over. If your business is public-facing and deals with large transactions, with a profit figure of around £30,000 or more, you may be better off registering as a limited company to protect your interests and be more tax-efficient.

If you would like any advice on setting up a new company, plus choosing the appropriate insurance package to meet your specific needs, please call our friendly team on 01609 773 748 or request a quote today