Being a company owner can be both thrilling and terrifying. You must have a legal framework for your sector, regardless of how big or small it is, with the majority opting for either a sole trader or a limited company, but what is the difference?
Simply Business estimates that 3.4 million people work as sole traders and 1.9 million as limited companies. The best business framework for you should be driven by your unique circumstances. We hope that by the time you finish reading this article, you will have decided on the best course of action for your business.
What is a Sole Trader?
When you work as a sole trader, you are self-employed and run your company on your own. Being a sole trader simply means that the owner and the company have no legal separation.
You can recruit employees, but your company is owned and managed by only one person: you. As a result, the law treats your business and yourself as one entity, making you legally responsible for any damages or debts incurred by your company. This means that any after-tax gains are yours to keep.
What is a Limited Company?
A limited company is a form of business structure that has been registered as a legal ‘person' with Companies House. This ensures that as a director of your limited company, you will be limited in your responsibility for any damages or debts incurred by the company.
What is the distinction between a Sole Trader and a Limited Company?
The most significant distinction between a sole trader and a limited company is that a sole trader is owned and operated by a single individual who bears unlimited personal responsibility for the corporation, while a limited company's ownership is divided into equal shares. Many freelancers start out as sole traders because they are relatively simple to set up, have a low administrative burden, and have lower costs. Limited Companies, on the other hand, are most often used for individuals who choose to start a non-profit or charity. A limited company's shareholders have limited responsibility for the company, which could mean that setting up the business as a limited company entails less personal financial risk.
Both Sole Trader and Limited Companies have advantages and disadvantages, but it all comes down to determining what is best for your company. In case you want to form a company or want a consultation on the best company structure for you, please contact Persona Finance (enquiries@personafinance.co.uk).