What is a Sole Trader?
A sole trader is someone who is the sole owner of their business and is self-employed. It’s the most popular business option and has a very simple business structure. You keep track of yourself, your work, profits and expenses for you and you alone. For tax purposes, you must sign up through gov.uk whereby you’ll be given an account HMRC and a Unique Taxpayer Reference (UTR).
Advantages:
- The process of becoming a sole trader and keeping on top of tax and paperwork is a relatively easy process as you’re responsible for only one person.
- You are granted more financial privacy than limited businesses.
- Sole traders are also granted more control of their business and retain all the profits of their business services.
Disadvantages:
- Sole traders are not seen as a separate entity by the law and can be subjected to unlimited liability. Their assets, personal savings and business profits could be at risk and any debt is their responsibility.
- If business expansion and growth is a personal dream, this may be difficult to do as a sole trader.
- In order to cover the costs of products and services, sole traders may have to charge more. This is due to the fact that sole traders can’t take advantage of economies of scale (saving in costs gained by an increased level of production) and may not be able to buy in bulk.
What is a Limited Company?
A limited company is a business structure whereby it has its own legal identity. This means it can be separate from any shareholders and directors within the business and can still be the case if only one person chooses to run the business. For example, a self-employed person who freelances their services out to others can still become a limited company rather than stay as a sole trader.
Advantages:
- A limited company benefits from limited liability. Legally, your limited company is considered as separate from the business owner and, if your company goes bust or gets into debt, your personal belongings won’t be touched.
- A limited company can be more tax efficient than a sole trader. Rather than pay Income Tax, they’ll have to pay Corporation Tax instead. Corporation Tax means that profits are taxed and they offer kinder rates, meaning that personal income is better.
- No-one else can use your business name if it’s limited, which offers protection against fraud and tax too.
- A limited company is easier to grow and finds hiring employees easier as they are seen as legitimate.
Disadvantages:
- There is a lot of responsibility and paperwork involved in becoming a limited company and this takes up a lot of time. With this extra drain on time and money, you may wish to look into hiring a company accountant for this.
- Every year, a limited company will need to declare their accounts to HMRC and CompaniesHouse which can be publicly accessed meaning no transparency or privacy for your business.
Whether you’re deciding to become a sole trader or limited company, it’s advisable to talk to an accountant first, especially if your services, finances or business situation are complicated. Get in touch with us at Barron & Co., for comprehensive accounting services in Birmingham.