Starting a business in itself is already quite a huge undertaking. Selecting the perfect business structure is no easy task either. You have to weigh the pros and cons of both approaches and pick whichever one fits your personal preference. Some people choose to be a sole trader to avoid all the red tapes and paperwork of being a limited company. If you are one of those who are still in the process of deciding which path to take, this article will give you a brief summary of both.
Advantages of being a sole trader
Maintain Control – As a sole trader you will be able to exercise maximum control over your business without having to worry about the input of others.
Your data is private – It is not mandatory for the data coming from sole traders to go public unlike limited companies.
You get to keep all your profit – As a sole trader you get to keep all your profits.
Disadvantages of a sole trader
Finance – Most sole traders face funding problems which hurts their expansion plans.
Liability – Because of its nature of being private, sole traders are accountable for full liability in the event that their business goes bankrupt.
Tax as a Sole Trader
If you are a sole trader and your profits are under the personal allowance of £10,000, you are not required to pay income tax and you are only therefore required to pay £2.70 a week for class 2 National Insurance, however, If your profits are under £5,885, you are not even required to pay that and are eligible to apply for tax exemption under class 2 national insurance. Also you are required to pay 9% class 4 national insurance if your business’ profits exceed £7,956 up to £41865 and 2% over the latter amount.
Advantages of a Limited Company
The company as an entity on its own – A limited company is taken as a separate entity on its own. This means that your company will live on even in the event that you pass away. The good thing about this is that, it will give employment security to your employees and business will not be disrupted.
Limited liability – Unlike if you are operating as a sole trader where you are personally liable for the business debt, if your business structure is a limited company, you are more financially secured and covered. In case your business goes bankrupt, you’re liability is based only on the amount of shares you have invested in the company. This is one of the biggest advantages of choosing the limited company route, however, some businesses or banks might require personal guarantees of business debt before lending to the company.
Company name –When you register as a limited company, you are also made to register a company name which will identify your business and will protect it.
Company Reach – It will grant you access to many clients who will not engage with sole traders, attract bigger businesses and gives your business more credibility.
Finance – Greater borrowing power to expand the business
Disadvantages of a Limited Company
Expensive – It can be more expensive to set-up and maintain a limited company.
Paperwork – Setting up a limited company requires a bunch of paperwork and consultation with accountants. The process is also lengthier.
Less Control – Because of its nature, limited companies often times face the problem of the shareholders caught in a dispute since it is not only one person who has all the control in the company unless there is only one person who is in control.
Tax as a Limited Company
The corporation tax rate for company profits from 1 April 2015 is 20%. As a director of a company, you are treated as an employees of the business, hence, you can decide to take the amount of salary you want. Also as a shareholder you are entitled to receive dividends from the company.