Sole Traders vs. Limited Companies: What's The Difference?
- Finance 101

Sole Traders vs. Limited Companies: What’s The Difference?

Starting your own business can be an exciting yet stressful journey. However, there are various aspects that you need to take care of before kickstarting your entrepreneurial venture. One of the first things you need to decide is your business structure. There are various structures you can pick to run your business.

You have a choice to run your business through a variety of structures. Sole traders and limited companies are two of the more popular ones. However, it can be hard to distinguish between these structures, so it’s best to let a chartered accountant help you understand the differences and select the one that suits your needs and requirements.

There is no one-size-fits-all solution to selecting the best business structure. You’d need to consider various factors before settling on one that helps fulfill your business goals. Two of the most common structures are sole traders and limited companies. Let’s have a deeper look into both structures and understand their differences.

Understanding Sole Traders
Understanding Sole Traders

Understanding Sole Traders

If you decide to run your business as the sole owner, you’re personally liable for anything that occurs within the business. You can hire staff, outsource services, buy equipment/inventory, and more. You have the power and control to decide what happens in the business. If you decide to use this structure, then please note that the law doesn’t distinguish between you as a person and your company.

Understanding Limited Companies
Understanding Limited Companies

Understanding Limited Companies

If you choose to run your business as a company, you’re essentially establishing a private company to run your organization. This business structure is different from a sole trader and has a separate identity and representation different from yours. All finances, operations, and other business matters will be separate from yours, and you wouldn’t be personally liable for the losses and debts incurred by the business.

As a director of your company, you can pay yourself a salary and dividends from the company’s revenue and profits. You can work around the tax rules by hiring a chartered tax advisor who can guide you in the best way to reduce your tax bills legally. All shareholders that represent and own the business have limited liability.

Running a limited company is much more complicated than running a business as a single owner. There are difficult tax requirements, and you’d need the help of chartered accountants and business advisors in the UK to help you navigate the tax and administrative complexities of a company. In addition, you’d need to comply with various tax and financial administration rules enforced by the HMRC.

Major Difference

One of the most significant differences between the two structures is the liability issue. You’re personally liable for every loss the business makes and every debt the company incurs as a sole owner. In the case of bankruptcy or recovery, your assets might need to be liquidated to pay off the business’s debts.

On the other hand, if you’re operating as a limited company, you’re not liable for the business debts or losses. So the shareholders involved in the business don’t have to liquidate their assets to pay off their debts.

It can be challenging to choose the best structure for your business as both have their advantages and disadvantages. There is always a trade-off, and there is no one-size-fits-all solution for deciding on business structures. You have to weigh the options and select the one that fulfills your unique needs and requirements. This is where getting the help of a chartered accountant can ease your decision-making process.

How Can Chartered Tax Advisers & Accountants Help?

It is always worth hiring the services of a chartered accountant or tax advisor who can explain to you the tax, legal, and other financial aspects of setting up your business as a sole trader or a limited company. They will have significant expertise in dealing with complex tax and formation issues and can guide you accordingly.

As a business owner, you might not have sufficient knowledge to decide your business’s best structure. Therefore, it is essential to engage with an accountant with significant expertise in business formation and complicated tax issues.

Also, the benefits of hiring a chartered accountant go beyond helping you with the business formation. They can handle all your daily financial matters, so you can afford to spend more time improving your business and focusing on your products and services. In addition, they will act as your representative to the HMRC and handle all complicated tax issues.

If you’re on the lookout for quality accountants who can help you decide on the best structure for your business, then you can’t look past the services provided by IBISS & CO. The company has grown leaps and bounds and is now considered the leading chartered accountant firm in the country.

They have recently expanded their operations and now have a huge presence in Walsall. IBISS & CO aims to empower local businesses and help them grow by taking care of their financial and accounting issues. You can get in touch with them today for more information.

About the Author

Mr. Moavia is a highly rated chartered accountant based in the UK who has significant expertise handling complex tax matters. He has worked with some of the biggest accountancy and tax firms in the country and has gained worldwide recognition for his work in this domain. He has helped small businesses, sole traders, large businesses, and multinationals with their complex tax matters, VAT, tax planning, etc. He also helps individuals, particularly landlords, with their self-assessments.

This means that you’re personally liable for any liabilities, losses, or debts the business has during its operations. On the other hand, you can enjoy all the after-tax profits and won’t have to worry about dividends or sharing them with anyone else. Small businesses like hairdressers, plumbers, or electricians often operate as sole traders.

Sole Traders vs. Limited Companies: What’s The Difference?

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