It’s a question all new businessowners have to contend with: should you register as a sole trader or limited company? Towergate Insurance explains more
Both statuses have their pros and cons, but one will be better suited to your company depending on its specific needs as well as your own personal preferences. This guide provides the key advantages and disadvantages of each to help you make an informed decision about what’s right for you and your business.
Sole trader
A sole trader is typically a self-employed person who works for themselves (though sole traders can have others working for them). Because this status means there’s no legal distinction between the individual and the business under the law, sole traders can be thought of as being the business.
Pros:
● Less paperwork. While both sole traders and limited companies have to complete an annual Self Assessment, sole traders face far less paperwork as they’re not so heavily regulated as a legal entity.
● You’re in charge. Unlike limited partnerships, which may be subject to multiple shareholders, each with some decision-making power, sole traders have full control over business decisions. This also means that…
● You keep all the profits. A sole trader keeps all profits from the business after taxes.
Cons:
● More accountability. Since a sole trader is typically one person, and the law doesn’t distinguish between the individual and the sole trader, sole traders are therefore wholly liable should anything go wrong, e.g. debt, legal trouble, etc.
● More taxes. While sole traders get to keep all of their profits, they pay more tax compared to limited companies, at a rate of between 20-45%.
● Less desirable to clients. Some companies see sole traders as being less professional than limited companies. If you’re trying to get work with bigger companies or corporations, this is something you’ll therefore want to bear in mind.
Limited company
A limited company is recognised as a separate legal entity under the law, meaning that the owners of the business– or shareholders – aren’t held personally liable for financial losses.
Pros:
● Reduced liability. In a limited company, businessowners or shareholders are not held personally liable for the business’s financial losses. Instead, they’re only considered liable proportionate to the number of shares they have in the business.
● Higher regard. Being a highly regulated entity, limited companies are often seen as more desirable to work with over sole traders, which could improve your client uptake.
● Less tax. While sole traders get to keep all of their profits, limited companies pay less tax, at 19-25% compared to the 20-45% sole traders pay.
Cons:
● More upkeep. In addition to the annual Self Assessment tax return, which sole traders also have to complete, limited companies have to file annual company accounts and keep meticulous financial records.
● Extra fees. Limited companies must register with the Companies House, which does incur a fee. Additionally, because of the extra admin involved, many limited companies enlist the help of an accountant, which is then an additional cost.
● Your business is more exposed. The fact that limited companies have to register with Companies House means that details of your company – annual accounts, records, directors and shareholders – can be seen by anyone as a matter of public record.
Trade insurance
Whether your business is in construction, builders’ merchants, painting and decorating, or something else, at Towergate Insurance we provide tailored trade insurance to suit the specific needs of your business.
Visit Trade Specific Insurance | Towergate (towergateinsurance.co.uk) for more information or contact 0330 828 5586 to speak to one of our expert advisers.
