The Differences Between A Sole Trader Business And A Limited Company.

Sole Trader

As a sole trader you will pay income tax on all the profits your business makes.  Your business is not separate to you so all employment income, dividends and bank interest is also included and taxed at the applicable rate.

Currently, you are required to submit a tax return each year by 31st January and pay any tax owed.  This is soon changing to mean that quarterly summary returns and a final declaration will need to be submitted.

If your sole trader business was to get sued you would be personally liable as the business is not a separate legal entity to you, the business owner.

As a sole trader business owner, your personal details are not publicly displayed.

You will have less admin work running a sole trader business, it is often easier and cheaper than running a company.

Limited Company

Limited companies pay corporation tax on their profits.  This is currently less than income tax, although companies don’t have a personal allowance and so the tax bill could be higher than a sole traders income tax bill.

A company is ran by directors and owned by shareholders.  You can be the sole director and shareholder of your company.

A limited company is registered at Companies House.

As a director you have legal responsibilities.  A set of accounts must be filed with Companies House annually and a corporation tax return and set of ixbrl accounts must be submitted to HMRC.

As a director you are separate from the business.  This means that you have less risk than a sole trader as the company is sued and not you.  A company can also take out and make contracts and agreements in its own name.

Paying yourself as a director can be a tricky decision.  You effectively work for the business so directors should be included on the payroll.  If you are a shareholder, you can pay yourself dividends and pay tax at a much smaller rate, currently 8.75%.

Directors are listed publicly at Companies House, as are details of the company.

There is more admin work involved in setting up and running a company, but depending on your earnings, you could save money/tax.

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