Difference between UK sole trader and UK limited company

UK sole trader and UK LTD

The difference between a UK sole trader and a UK limited company is mainly related to liability, paperwork, taxation, finance, perception, and flexibility.

1. Liability: A sole trader has unlimited liability, meaning they are personally responsible for the debts and losses of the business. A limited company has limited liability, meaning the business is a separate legal entity from its shareholders and directors, who are only liable for the amount they invested in the business.

2. Paperwork: A sole trader has less paperwork than a limited company. They only need to register with HMRC as self-employed and file an annual self-assessment tax return. A limited company has more paperwork than a sole trader. They need to register with Companies House, file annual accounts and confirmation statements, keep records of shareholders and directors, and pay corporation tax.

3. Taxation: A sole trader pays income tax on their profits, which can be higher than corporation tax depending on their income bracket. They also pay National Insurance contributions (NICs) on their earnings. A limited company pays corporation tax on its profits, which is currently 19% but will increase to 25% from April 2023 for businesses with profits over £250,000. The owners and directors of a limited company can also pay themselves a salary, dividends or both, which have different tax implications.

Also read: What is a UK community interest company?

4. Finance: A limited company may have more access to finance than a sole trader, as they can raise funds from shareholders or investors, or borrow money from banks or lenders. A sole trader may have more difficulty obtaining finance, as they rely on their personal credit rating and savings.

5. Perception: A limited company may have more credibility and professionalism than a sole trader, as they have a formal business structure and their financial information is publicly available. A sole trader may have less trustworthiness and reputation than a limited company, as they operate under their own name and their financial information is private.

6. Flexibility: A sole trader may have more flexibility than a limited company, as they can make decisions quickly and easily without consulting anyone else. They can also change their business structure or cease trading at any time. A limited company may have less flexibility than a sole trader, as they have to follow the rules and regulations of Companies House and HMRC. They also have to involve their shareholders and directors in decision-making and follow a formal process to close down the business.