Your Total Guide To business

Sole Traders Vs Limited Companies

As with everything, each different business type comes with their very own set of advantages and disadvantages. So choosing the best option for you and your company depends entirely on what you want from your business.

Sole Traders

Becoming a sole trader is the most straight forward business set up there is! The term can be used to refer to any business that’s owned and controlled solely by one person with or without a small work force, for example; electricians, plumbers and hairdressers.

Pretty straight forward we’re sure you’ll agree? But this is where it gets a bit more interesting, sole traders are not separate from their owners finances which basically means owners are personally liable for any businesses debts accrued, and they might even have to pay them out of their own pocket.

Advantages

  • The businesses are usually small, and easy to set up because no formal legal paperwork is required.
  • Usually, only a small amount of capital is needed to be invested, which ultimately reduces the initial start-up cost.
  • It is easier to keep overall control, because the owner has a hands-on approach to running the business and can make decisions without consulting anyone else.

Disadvantages

  • A sole trader has no one to share the responsibility of running the business with. Just because someone’s skilled in their trade, it doesn’t necessarily mean they’ll be good with accounts.
  • Depending on the amount of capital personally available, developing the business may be limited.
  • The risk of ‘unlimited liability’ generate by business debts.

Limited Companies

Public Limited Companies or PLCs are businesses which have been established with at least 2 shareholders.

Limited companies, unlike ‘sole traders’ have their own legal identity so their owners are not personally liable for the firm's debts, it also means they can own assets in their own right and there are some major tax benefits available to them. The ownership is divided up into shares and control of the business goes to the majority shareholder.

There are two requirements for setting up a limited company. Firstly the Company must be registered with Companies House and secondly the company must have at least one Director who is at least 16 years of age

Individuals running or in the process of establishing a limited company are suggested to pay themselves minimum wage. By doing so, this allows them to take full advantage of the £6,475 tax threshold. Individuals are required to earn over this amount before they are eligible to pay income tax.

Advantages

  • Shareholders have no personal liability for any business debt accrued.
  • Banks are happier to lend to limited companies, especially when directors have security such as equity in the form of property.
  • Limited Companies are only taxed on their profits which mean they are not subject to the higher tax rates placed on sole traders or partnerships which can reach up to 40%.

Disadvantages

  • Due to the nature of a PLC sometimes problems arise between Directors and Shareholders.
  • In comparison to Sole Traders there are complex rules governing the accounts and bookkeeping of Limited Companies.
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