Planning to start a business? Confused whether to go on the route as a sole trader to create a limited company? Here’s a comparison between two to help you choose.
First, lets begin with simply defining the two. A sole trader is a self-employed person who has the sole ownership of their business. Since it is rather simpler structure, therefore it is rather common. A limited company on the other hand is a type of business model that has its own legal and distinct identity, one which is unassociated from both its owner also known as the stakeholders and its managers also termed as the directors. To create a difference between the two, here’s a list of pros and cons for both limited companies and sole trading.
Limited Company vs Sole Trader
For a limited company, its legal identity is separate from its shareholder. It provides a limited liability protection which ensures that in case of any loss or debt, the owner loses only the share they have put in the company while the rest of their personal assets are saved.
For a sole trader, however, there’s unlimited liability i.e. little distinction between the owner and the business. In this way all the company’s loss and debts are the owner’s responsibility which puts their personal assets at stake.
Owning a limited company has its advantages and one of the most prominent one is taxation. This is because working through a limited company is more tax efficient as the owner has to pay corporation tax and dividend tax.
For a sole trader, on the other hand, the owner has to pay taxes on all the profits which is greater than their personal tax allowance.
While for a sole trader, it is easier to set up a business and experience better privacy than limited company. However these advantages are outweighed by the benefits of a limited company which are better both quantitatively and qualitatively.