No matter the type of business you’re operating, it needs to be legit. However, the options can get confusing at times, which is why you should be well-versed when choosing to operate either as a sole trader or a limited company. With more and more people wanting to start their own business, there are plenty of opportunities to get an enterprise off the ground.
Support exists for every type of business in every industry. Doing your homework with guides like this one can help you navigate the exciting and stimulating road to entrepreneurship. Each has its own ups and downs, which is why it’s important to know what you’re getting into.
Difference in Liability
The first and foremost difference between Sole Trader and Limited Company is the liability. That means that sole traders are fully liable for everything in their business, meaning there is no difference between their personal and company assets. However, with a limited company, your personal assets are protected because the company has its own legal identity. Even though sole trader has full liability, it’s much easier to set up and legally organise than a limited company.
Managing taxes
There is a significant difference in how taxes are handled with either company type. It’s important to understand taxes, as it’s the basis on deciding if you want to stay as a sole trader or move on to a limited company.
Sole traders pay self-assessed taxes on their business profits, while limited companies have a more complicated system which involves dividends, and specific allowances. Even though limited companies have higher profit potential in most cases, it can be a real hassle to manage taxes, which is a legitimate reason why some remain as sole traders.
Insurance
Each type of business needs to have its own insurance. National Insurance is the first step, but each business has its own issues, so having extra insurance is a must. That’s because National Insurance can be very difficult to navigate, especially if you’re working as a limited company. It can be easier as a sole trader, but it’s always wise to have extra counsel.
Annual accounts
Limited companies are required by law to prepare annual accounts once the financial year ends. They are part of the company tax return, and they’re filed with the HMRC, and they must also be filed with information about the shareholders and the director. However, sole traders aren’t required to file annual accounts, but simply do their efile tax returns and keep records of their business expenses and income.
Public image
Not every aspect of choosing a company type is about financial or legal matters. There are some contractors or agencies that might refuse to work with a sole trader, simply because a limited company sounds like a more serious and professional entity. Coupled with the fact that sick days can make or break a micro-business, there truly isn’t a better choice when it comes down to choosing.
