Sole Trader A structure in which a business is owned by one person, acting under their own name or using a ‘trading name’. This person is fully liable for the company’s debts and contracts and there is no distinction in law between the business and their own personal wealth i. e. unlimited liability. This means that their personal possessions are at risk and Limited Company A corporate structure in which the shareholder(s) own the businesses and their responsibility for company debt is limited to the amount they have invested in the company.
The company is run by a board of directors who act on behalf of the shareholders, although in most small businesses this may well be the same individual(s). One of the main reasons that people decide to trade as a limited company rather than a sole trader or partnership is due to the tax benefits. The use of dividends and sensible payroll planning often mean that the business owner(s) can make substantial tax savings. These savings would of course need to be set against the additional administration costs of running a limited company, however generally most individuals are substantially better off by acting through a limited company.
A Chartered Accountant or Tax Adviser should be able to guide you in relation to tax planning and how you can minimise your tax liability. Another significant reason why people decide to trade through a limited company is due to issues regarding liability. When operating as a sole trader there is no legal distinction between the identity of the business and the individual, which means that any debts of the business are the responsibility of the individual.
However if the business is set up as a limited company, the debts are the responsibility of the company. The shareholders are only liable to the extent of the capital they have in the company (i. e. their personal possessions are not at risk). This is a significant factor to consider. Perception By deciding to trade as a limited company, this often creates the perception that the business is an established, long term business which can be of benefit. Trading as a limited company is usually viewed as the most professional way to trade.
As well as giving confidence to consumers, this may also improve relationships with other businesses. Accounts & Administration. When trading as a sole trader, you will need to prepare accounts and submit an individual tax return on an annual basis. Depending on your circumstances, there may be some other requirements during the year, such as VAT returns. However the level of detail in the accounts and general amount of administration is significantly less than trading through a company.
When trading through a limited company, detailed accounts need to be prepared. The directors must also ensure that the company complies with the Companies Act, including keeping a company register and maintaining the relevant records for example. As a result, accountancy and administration costs are likely to be substantially higher for a limited company There are also other factors we may need to consider and therefore we should think about consulting a Chartered Accountant if we are in any doubt as to what structure it right for we.