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Limited Company Versus Sole Trader

Ever wondered what the key differences are between being either a 'Sole Trader' or a 'Limited Company'? Read our useful guide to find out more.

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We are often asked the question: ‘Should I register as a Sole Trader or a Limited Company? The short answer is that it depends on how you want to run your business, and the level of risk that you are comfortable with.

What is a sole trader?

You run your business as an individual and are self-employed.
You keep all the profits from your business after you have paid tax on it

You are personally responsible for any losses your business makes, and for paying any creditors.

Limited Company Versus Sole Trader - electrician

What are the benefits of being a Sole Trader versus a Limited Company?

Easy to set up and operate as a sole trader
No legal difference between the owner and the business
Less legal responsibilities and duties than a limited company
You can withdraw money from the business as “drawings”, as and when it is needed
No need to run a payroll unless you have employees

Greater privacy. Limited companies and their directors are listed on Companies House.

Trading losses could reduce your personal tax bill

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Marco Drez
Chef @ Drez-Cooks

A limited company is a company
‘limited by shares’ or ‘limited by guarantee’.

A limited company is a business that is 'limited by shares' or 'limited by guarantee'. This means the company:
Is legally separate from the people who run it
Has shares and shareholders or guarantors, and a ‘guaranteed amount’ if limited by guarantee
Has separate finances from personal ones
Is able to keep any profits it makes after paying tax if it has shares, or invest profits back into the company if it has guarantors
What are the benefits of being a Limited Company versus a Sole Trader?
Limited liability - you will not be personally liable for any financial losses of the business - assuming there is no fraud.
Professional image – working through a limited company may give you more credibility than working as a sole trader.
Control - as a director/shareholder you have the ability to decide your own remuneration package, to minimise the corporation tax the company pays, and your own self-assessment tax. For example, paying yourself a small salary and taking the rest of your income as a dividend.
Limited Company Versus Sole Trader - garden nursery business

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