Sole Trader verses Limited Company
Operating a business as a sole trader is not the same as being the sole owner of a limited company. Many companies do operate with a single director and shareholder and this is very typical for new companies at the time of registration.
Are you confused between the two?
There is occasionally misunderstanding and confusion when an individual starts a business. Should they register a company and, if not, can they register their sole trader business?
The first point to make is that a ‘sole trader’ and a ‘limited company’ are two different business formats. A sole trader is one person in business without a formal legal structure whilst a limited company is a separate legal entity that is operated by at least one person.
Forming a company is the creation of a formal business structure in which to operate your business. People do business and enter into contracts with the company and not a person. The business is run by a person but legally there is a business arrangement between the buyer and the company.
A limited company is a popular business format for many people starting out.
Benefits of being a limited company
Limited Liability. One of the main benefits is the protection of the owner’s assets. A limited company is a legal entity in its own right. The liability of the shareholders (the owners) is limited to the money paid for the shares. This is typically just £1 but will depend on the value of the shares issued.
Selling the business. It is normally easier to sell a limited company. It can be difficult to sell a sole trader business as the person running the business ‘is the business’.
Drawbacks of being a limited company
Accounting. There are greater accounting requirements for companies. Accounts must be filed at Companies House in a specific format. This may require assistance from an accountant
Transparency. Companies have to file documents with Companies House which are available to the public (at a cost). However, you only need to make public abbreviated accounts which provide limited information. Annual returns are filed to confirm the company officers and shareholders details. However, personal information is no longer available when a service address is used
In simple terms a sole trader is one person running their own business. It is an informal but flexible way of operating a business. If you decide one day to sell some goods or a service then you are a sole trader in business. There is no official register and no public record that you are in business. You simply tell HM Revenue and Customs that you have started trading.
Benefits of being a sole trader
Flexibility. Starting and stopping business as sole trader is easy.
Reduced accounting. Whilst a sole trader needs to keep accurate accounting records and submit self assessment tax returns, VAT and PAYE reports where applicable, there is no requirement to file any public accounts.
Drawbacks of being a sole trader
Liability. This is arguably the biggest negative to being a sole trader. The liability of the individual is unlimited. In the event that the business is pursued for a debt the personal assets (house, car, property etc.) of the owner are at risk. There is not the limited liability provided by a limited company.
Perception and reputation. A sole trader has no formal legal status. The business is the individual and not being a registered company may provide an impression that the business is small, less established and not accountable to anyone.
Less tax efficient. Depending on the circumstances it is likely that being a sole trader is less tax efficient than operating as a shareholder in a registered company. It is not possible to carry profits forward and all profit is declared and taxed.
Registering your business
To register a ‘company’ you need to process a company formation.
The company formation documents are submitted to Companies House and the company is placed on the register and issued with a company number.
There is no register for a ‘sole trader’. When you start business you simply inform HM Revenue and Customs that you have started trading. There is no official register and we do not recommend you pay anyone to provide such a service.
Company registration is a very popular choice of business vehicle due to the benefits which often out way the drawbacks.