To comprehend the advantages of having a Limited Company over Sole Trader we need to first understand the basics of both these establishments.
A sole trader can be easily understood as an organisation owned by a single person where the liabilities are not transferred to any other entity. This stands out to be the easiest structure when it comes to the starting a business in the UK.
A Limited Company, on the other hand, is an establishment where the business itself is an identity and is primarily run by the Directors and Investors. An investor may also work as a Director. A Company may also have a single person as a Director as well as a shareholder.
There are a plethora of differences between both the structures and these differences are also reflected in the operations. Few of the most common differences are as follows:
- A Limited Company is an identity in itself and hence, even as a shareholder your liability is limited whereas as a Sole Trader, the liabilities are unlimited and all your business debts are your personal debts.
- Setting up a sole trader structure is much easier in comparison to the Limited Company.
- One of the prime benefits of a Limited Company is the taxation benefits. After a certain level, sole traders may not be able to enjoy lucrative benefits because the entire income is subject to the NIC rules whereas, in a company, investors or stakeholders may withdraw less salary and take the major benefits in the shape of dividends.
- When it comes to the financial strategies or raising the funds for the business through loans or investment, Limited Companies derive the maximum benefit. Being a more transparent business structure, it’s comparatively much easier to get investment for a registered Limited Company.
- Limited Company gives you an additional benefit because in a Limited Company, assuming that no financial forgery has happened, you are not directly responsible for any financial losses arising in the normal course of business. Managing a business as a sole trader will not have any such benefit.
- Registering your organisation as a Limited Company gives a much professional shape and image to the work and hence, when it comes to dealing with bigger companies, Limited Companies are always preferred. The name of the Company is protected by the law for the Limited Companies but as a sole trader, you cannot do anything if your business name is claimed by someone else and this can do irreparable damage to your business.
- As a stakeholder of a Limited Company, you reserve the right to sell your shares or transfer the ownership to someone else which cannot be done in the case of a sole trader. Even if you sell the whole business as a sole trader, the buyer will not be able to enjoy the positive goodwill generated in past periods.
- A limited company can provide pensions to its ex-employees and this the expense will be treated as a legitimate expense on the company’s end and will be eligible for the tax benefits.
Most of the organisations prefer to register themselves as sole traders primarily because they are a start-up and do not want to get indulged into too much paperwork. However, once a business starts to earn recurring and sustainable revenue, it is advised to register a Limited Company.
The Company Formation provides comprehensive services related to the formation of the companies and we also manage the entire process for you so that you may emphasize more on your core business.