Sole Trader or Limited Company? Top 5 Questions To Consider.

  • 5 min read
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A quick and easier answer to this age old question:

You should go Sole Trader if you do not intend to hire people and your customers don’t mind dealing with Sole Traders.

You should consider registering a Limited Company if you want to limit your liability, hire employees and your customers prefer to deal with limited companies.

The UK has over 3.5mn Sole Traders. Nearly 4.6mn out of 6mn UK private businesses have no employees according to the Federation of Small Business. A large number of these businesses are also limited companies.

Many people consider whether they should go as a Sole Trader or a Limited Company. The choice is often dependent on your individual circumstances.

Many wonder if there is a big tax difference between going Sole Trader or a Limited Company. The short answer is that if your business is relatively simple & straightforward, then the difference in taxes is minimal (please speak to an accountant about specifics).

If you intend to hire people, bring on business partners, seek investments, borrow money, invest in Plant & Equipment, do Research & Development, then tax considerations are much more complex, and generally, a Limited Company is the preferred structure.

Here are the Top 5 answers to deciding whether to go Sole Trader or Limited.

1. Do you intend to hire employees?

If you intend to hire employees for your business, then a limited company is generally a better alternative. ‘Limited’ in the limited company means that the company’s liability is limited by shares.

That means that as the owner of the company your liability for the company’s business is limited to your investment in the company. When you are hiring employees, you will need to set up payroll, taxes and other administrative tasks. While you can hire employees and contractors as a Sole Trader, most people prefer to work for a company and you may want to limit your liability associated with employing people.

It is always good to talk to an employment lawyer and/or accountant before you start hiring people. Broadly, a limited company is better for these purposes.

If you do not intend to hire employees, then being a Sole Trader is a more viable option.

2. Do your clients prefer to deal with limited companies rather than with individual Sole Traders?

Many companies prefer to contract with other limited companies. There are many reasons why companies prefer to deal with other limited companies. One of the main reasons is that all limited companies must comply with the Companies Act and have filings with Companies House about the company’s directors, shareholders and financial accounts. In other words, it is often easier to do background checks on limited companies.

If your clients do not mind whether you are a Sole Trader or a Limited Company then, being a Sole Trader is a viable option.

3. Do you intend to have business partners?

If you intend to go into business with a partner or partners, then a Limited Company is a better choice than being a Sole Trader. The reason is that you can create allocate shares in the company to different business partners. Shares in a limited company determine what % of the business each partner owns.

You can also have shareholder agreements that determine how shareholders behave when running the company. Going ‘Sole Trader’ is not particularly useful for a business that will have more than one owner.

4. Are you delivering high value products or services?

If you are delivering high value products or services (for example, professional advice to large companies), you may want to consider the advantages of a Limited Company. This is where your liability as a Shareholder in a company is limited to the share capital that you have invested in the company.

You can start a company with just 1 pound in share capital. As a Sole Trader, you are fully liable as an individual for any products and services that you deliver. Your clients and counterparts may seek compensation from your personal savings etc…

It is important to note that as a Director & Shareholder in a Limited Company you must still abide by all the laws of the land and perform your duties with care. A Limited Company will not shield you if you do something illegal or deliberately perform actions that would be considered done without care.

5. Do you intend to borrow money or get outside investors to fund your business?

If you are looking to borrow money or get outside investors (like your family & friends) to invest in your business, then a Limited Company is a preferred choice.

The reason is simple. When you are borrowing money or other people are investing in your business, you want your lenders and investors to have the greatest assurance that you will run the business for the intended purpose.

If you are seeking investment, then your investors will get shares in the company that gives them voting rights and legal protections. Your shareholders may also become directors of your company and ensure that the company is administered well.

If you are borrowing money, then your lenders (if they are individuals or investment funds) may want the ability to convert their loans into shares in the future. This can only be done with a limited company.

If you are not seeking outside funding, then going ‘Sole Trade’ is a viable alternative.