Sole Trader or Limited Company - what is the difference..?

 I have been asked on many occasions what is the difference between running your business as a Sole Trader versus a Limited Company...?

In this article I set out some of the advantages and some disadvantages to give you a good idea, however I must caveat that I am not providing formal advice in this article and I am sure you can appreciate that the law does change over time and therefore you should seek proper legal advice before you decide which route you take.

In our network today I would say that 75% are sole traders and 25% are limited company although there are more choosing Limited Company than previously.

The Advantages

Limited Liability separates your Personal Finances from your Business Finances. 

This is one of the biggest reasons that people choose this route. As a sole trader the business is "you" and therefore should a customer have a claim against you (for loss, damages or similar) then a claim is against you personally and you would be required to settle the claim using personal money or assets. 

As a Limited Business then any claim from a customer would be against the company. It would be for the "company" to settle the claim and would not impact your personal money or assets.

NB. Be aware of the need to provide "Personal Guarantees" (these are sometimes requested when a company is newly established or not credit worthy) as this would remove the "limited liability" provided by this set up. 

Professional Image

In the eyes of some customers dealing with a limited company can provide more trust and the feeling that they are dealing with something bigger than a one man band running as a Sole Trader.

Name Protection

When establishing a Limited Company it will be registered at Companies House. Once set up then no other company can use the same name although they could set up a similar name (subject to some rules and regulations).

Please note that as part of the franchise you are no longer allowed to use the Trading Name (Pestforce, Lockforce, Washforce) in the name of a Limited Company.

Ability to be tax efficient in how you pay yourself

This area can be quite complex however as a business owner you will have various options on how you receive your earnings in a more tax advantage manner.

This is likely to involve the use of a Salary and the payment of dividends.

You can make contributions to your pension that will reduce your profits declared and thus lower the tax you pay.

You can also "spread" your income over a number of years.

It is not expensive to set up

The set up of a limited company is not complicated or expensive in a basic form. You can buy a company directly from the government ONLINE. It will cost about £15.00.

The Disadvantages

You will be subject to the Companies Act

This means that you are subject to more complex Accounting and Administration requirements including Annual Accounts, Annual Corporation Tax return and Annual Confirmation statement.

Higher Accountancy / Company Secretary costs

Due to the above you will need to ensure that you have the support of a good accountant / bookkeeper to keep everything up to date.

Payroll 

You will have extra work to manage your payroll payments although this can be a job for your accountant / bookkeeper.

Public View

As a Limited Company then certain information will be held on Companies House and this is viewable by the public. This includes financial information (limited depending on the size of your business) and Directors address etc..

Self Assessment

You will be subject to Self Assessment for calculating your annual tax return.

Overall considering the Financials

When you do the maths the personal financial benefits of being a Limited Company compared to being a sole trader are in favour of the Limited Company. 

This is based on you having full access to your full tax allowances etc...

If your earnings are between £40k-£70k then you could be better off by between £1k-£3k per year.

This saving is to be offset by the additional costs of running a limited company with accounting and admin support.(as highlighted above).

My view is that if the finances balance out (between the cost and the savings) then I would recommend being a Limited Company and having a good accountant / bookkeeper to help and support you and your business.

Note - this information will be subject to change as tax allowances and rules may change. Please consult with an accountant.