Sole Trader/Partnership or Limited Company? Which is right for you

This is one of those questions where there is no right or wrong answer. The answer is “it depends”. It depends on what is important to you and what will suit your particular situation and circumstances.

We will try to give you the facts here so that you can make an informed decision. 

For the rest of this article we will refer to Sole Traders but the points will be relevant for Partnerships also.

 v.

There are three key differences between Sole Trader and Limited Company businesses as follows:

*** Tax ***
*** Risk ***
*** Cost ***

It depends on which of the above, or combination of the above, that you consider to be the most important. This will guide your decision.

Tax

There are differences in National Insurance Rates and Personal Tax Rates between Sole Traders and Limited Companies. The simple calculator below will show you the difference in tax burden between the two types of business. All you need to do is answer the simple questions to start with and the calculator will do the rest.

As a general rule the tax burden under the Limited Company route will be lower than that under the Sole Trader route. However, this difference is modest at low to moderate profits. As your profits grow the Limited Company route becomes more attractive.

Incorporation Calculator 2017/18

Risk

As a Sole Trader you are the business. To work out your business results and business taxes we split the business assets and activities from your personal assets and activities. 

However, if something goes wrong (for example you get a legal claim against your business) then you would hopefully fall back on your insurance policy. If this doesn’t protect you, for some reason then in that situation everything you own is at risk – your business assets, your home, your car etc. In this situation there is no distinction between personal assets and business assets. Everything is at risk.

Compare that with a Limited Company. Under the same example above what is at risk now? The answer is everything owned within the Limited Company. Your personal assets are outside and therefore not at risk.

The above is what is known as a Limited Company ring fencing its own assets. There is only one situation where a creditor of the company could “break down” the corporate veil and target your personal assets – and that is where you are found to have done something illegal. 

Cost

Generally speaking Limited Companies are more expensive to run than Sole Trader businesses. Accountancy fees for example are higher for Limited Companies (compare our Sole Trader and Limited Company packages as an example). This is largely to do with the increased regulation governing Limited Companies.

There are other costs as well such as Companies House fees for various filings.

Financial costs are not the only cost of running a Limited Company. You also have operational costs. These include the cost to the business of filing accounts at Companies House for the public to see. Sole Traders don’t file any accounts for public viewing. Think about your accounts, what would customers or suppliers think if they saw these accounts? Do they reflect well on your business? Maybe there are loans or overdrafts you don’t want to make public.

The flip side of the above is that for some industries and markets, customers actually prefer to deal with Limited Companies. Some even refuse to grant work to Sole Traders. The public impression is that Limited Companies are more secure and more established than Sole Trader businesses.

Conclusion

Some of our clients place all of their decision on tax alone, others on the risk point alone – i.e. they are in a risky industry so want the added protection the Limited Company structure gives. For others it is a balance of all of the above.

Hopefully this short article has given you enough insight into the key differences for you to start to formulate an idea as to which is best for you.

Just so you know this is not a onetime decision – if you start as a Sole Trader you can always switch to a Limited Company in the future – we can guide you through this relatively straight forward process. In fact many of our small start-up businesses start simple and at low cost (i.e. the Sole Trader route) and as they grow we discuss with them when the best time to switch to a Limited Company may be.

If you want to discuss this any further then call us on 0333 003 5833 and ask to speak to one of our Directors or Managers.