The difference between a Limited Company and a Sole Trader
Each structure has advantages and disadvantages which are outlined below to help you choose the best option for your circumstances.
| Limited Company | Sole Trader | |
|---|---|---|
| Liability | Its own legal entity, so as a shareholder you have limited liability (hence the name 'limited by shares'). | There is little distinction between the business owner and the business. Any business debts become your debts and your personal assets - including your house - are not protected. |
| Tax | Tax is deducted from directors' salariesvia Pay As You Earn (PAYE) and paid at regular intervals to HM Revenue & Customs (HMRC). All directors are also obliged to complete a tax return unless they received absolutely no pay or benefits; irrespective of whether any tax is owed.For limited companies of any size, corporation tax is charged at 19%. | Sole traders pay tax on their business profits, via the self-assessment tax return system. The deadline for online tax returns is 31st January after the end of the tax year. |
| National Insurance | Both employer's and employee's National Insurance (NI) is payable on directors' salaries and bonuses. | Pay Class 2 NI contributions of £3.00 per week and Class 4 contributions on profits in excess of £8,632 (rates accurate for 2020/21). |
| Accounts and tax returns | Must prepare annual accounts from thecompany's records at the end of the financial year. These are filed with HMRC as part of the company tax return and sent to all shareholders and Companies House. A limited company must also file a Confirmation Statementwith Companies House, which includesinformation about the directors, shareholders and registered office. | Are not legally required to have or file annual accounts but they still have to keep a record of business expenses and income to fill in their tax returns. |
| Prestige | An incorporated company, whilst not guaranteeing reliability, gives the impression of a soundly based organisation and may appear more credible. | In certain sectors, contractorsor agencies may not work with sole traders because of the legal protection a limited company provides. |
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