Which direction to take? Sole Trader or Limited Company?
Our following guide examines the main differences between a business run by a Sole Trader or Limited Company.
Sole Trader or Limited Company at a glance
- A limited liability company is a separate legal entity to its shareholders and directors. Unless there is proof of fraud or evidence of corporate manslaughter, neither shareholder or director can be held personally accountable for the company’s actions.
- A sole trader is held personally liable for his business borrowings and to any creditors if his business fails. He will also be held personally liable for other claims. When insurance does not cover the certain claim, the sole trader will be personally liable for that.
- Once you start employing people or expanding you may worry less if you have the benefit of separate legal liability.
- Running a business via a limited company looks more impressive. You simply look like a bigger operation.
- You also can run your business in a partnership via an LLP. However, partners may still be remaining jointly liable for certain acts of the LLP and this can result in personal bankruptcy.
Sole Trader or Partnership | Limited Company: you are director & shareholder |
You are the business | The business is a separate legal entity |
You are the owner | You are a shareholder; you hold all or a proportion of the company’s share capital |
You are the manager or proprietor | You serve the company as its officer as a director (a company secretary is an officer too) |
In the event of any legal dispute, you will be sued personally unless you have suitable insurance e.g. products and services liability, professional indemnity, employer’s liability etc. | In the event of any legal dispute the company will be sued unless it has suitable insurance cover. It is exceptionally difficult and rare under UK law for anyone to sue a director personally for a company’s wrongdoing. There are exceptions where the “corporate veil” may be pierced and a director may be held personally accountable, e.g:
|
Employment status:
|
Employment status:
|
Tax on profits:
|
Tax on profits:
|
Losses:
|
Losses:
|
Extracting profits
|
Extracting profits
You are taxed on:
|
Borrowing
|
Borrowing
A director may borrow from his own company. Limits are set by Companies Act 2006, but there are tax costs:
|
Pension
|
Pension
|
Insolvency
|
Insolvency
|
Accounts
|
Accounts
|
Selling the business
When the business or assets used in it are sold, you are personally taxed on any gain under the Capital Gains Tax (CGT) rules.
|
Selling the business
When the business or the assets used in it are sold, there is a double tax charge on shareholders. The company pays corporation tax on any profit that it makes on disposal. The shareholders are taxed on the distribution of the proceeds.
|
Death
|
Death
|
Paying yourself
|
Paying yourself
|
Expenses in general:
|
Expenses in general:
|
Cars and fuel
|
Cars and fuel
|
Mobile phones
|
Mobile phones
|
Computers
|
Computers
|
Tax-free benefits and incentives
|
Tax-free benefits and incentives
|
Working from home
|
Working from home
|
Charging rent for use of home
|
Charging rent for use of home
|