Limited Company Vs Sole Trader – The Startup Dilemma!

by | 1 Mar, 2022

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Limited Company Vs Sole Trader – The Startup Dilemma!

Starting your own business venture is one life’s most exciting, yet daunting, prospects. There’s the potential for longevity and huge returns, yet also considerable potential for failure and losing lots of money and investment. Still, you can’t make an omelette without breaking a few eggs, so to make a startup work you have to plough ahead, even with the risks considered. However, there are a few choices you can make that minimise these risks depending on your position and circumstances when starting up the business. A big one is whether to register as a limited company or as a sole trader.

What’s the difference between Sole Trader vs Limited Company?

First thing’s first, let’s explain the difference. What a limited company and a sole trader have in common is that with both, you can be your own boss, work with a variety of clients and set up relatively simply. Apart from that, there are a few key differences.

A Limited Company:

A Limited Company means when you start up your company, you will set up a private organisation to essentially run the business. This lets the business have its own legal identity that is separate to yours, and your finances from the business will be kept separate from your own personal finances. It’s all about adding a degree of separation between you and the company that you run – if you’re the director of a limited company, you have limited liability on any negatives that occur, such as debts or losses.

Advantages of a Limited Company:

  • If damages, debts or losses are incurred by the business, you have a limited level of liability, meaning you are not personally responsible for anything going wrong. This is convenient for obvious reasons!
  • If you’re the director of a limited company, you can be paid in a lovely mixture of both your salary and Since dividends have a much lower tax threshold than income paid via salary, this means you won’t have to spend as much on your tax bill every year. Big thumbs up for the dividends!
  • If you ever do need to leave the company, the process should be a lot cleaner and easier, as you aren’t the only one entirely responsible for the whole business.

Disadvantages of a Limited Company:

  • Compared to a sole trader, a member of a limited company is more likely to face more complex tax requirements and headache-inducing admin than the likes of a sole trader. (However, this is where consulting companies like us at Cubed Consultancy can help – but more on that later!)

A Sole Trader Company:

A Sole Trader on the other hand is somebody who is entirely responsible for the running of their business. They may hire staff, but all the responsibility and management lies squarely on their shoulders. Legally, you and your business would be one and the same in the eyes of the law, so unlike a limited company where you and your business are separated, a sole trader and their company are looked at as the same entity. There are, of course, some extreme advantages and disadvantages to this.

Advantages of a Sole Trader Copmpany:

  • A sole trader gets to keep all of their business’ profits. There are no partners to share it with, so you get to reap the rewards entirely. This is ideal for the likes of hair-dresses or tradespeople who don’t really need to start a whole business full of employees to turn a profit.
  • If you’re dipping your toe into the water of starting a business, it’s usually better to start off as a self-employed sole trader first to see where you stand. It’s a good time to test demand for your product, how you can handle your finances (including profits and costs incurred) and it also means that your business is kept small whilst you iron out some kinks in your business plan. Sole responsibility may be daunting for some people, but for others it can be a convenient factor when just starting out.

Disadvantages of a Sole Trader Company:

  • You as a director of the company are entirely liable for all debts, losses, and costs that your startup incurs. This means you will have to pay them entirely out of your own pocket. If your business falls on its face and loses a lot of money, this can be very problematic indeed.
  • You are completely accountable for what happens within the company. You may hire staff, some of which can be there for a long time, but they won’t be responsible for what happens to the business. It’s worth considering that as a sole trader, you’ll essentially be on your own when dealing with company problems.

Which One is Right For Me? Sole Trader Company or A Limited Company

Registering as a sole trader or a limited company will depend on your personal preference and your confidence in running a business. A limited company can be the better option for those who are looking to start up a business with a few other people, or simply for those who would be more comfortable with that level of separation between yourself and the company. Indeed, a legal difference between you and the company you run isn’t really a bad thing and can minimise your losses if you ever hit a tight spot.

However, there is something to be said for doing a little “stress test” with your startup before you commit to it in the long term. By this we mean registering self-employed as a sole trader at the beginning of your startup journey. Not only is it more cost effective, but you can see if there are any cracks or mistakes in your business plan before you turn into a full-blown company. Of course, this is best suited to a startup that isn’t going to incur massive losses or costs in its first year or two – there is always a level of risk when taking all responsibility, yourself!

How We Can Help

Cubed Consultancy is a consulting agency that helps clients with all matters relating to accountancy, tax, corporate finance and wealth management, no matter big or small. Headed by Mark and Richard, two chartered accountants with years of experience between them, Cubed has grown into a solid, tight-knit business due to the bond we have with our clients and how closely we work together as a team. Our mission is to simplify the accounting and tax experience for everyone, whether you’re an individual or a corporation. We aim to be a business that helps you achieve your personal and professional goals, and more importantly, a business you can trust.

We at Cubed can offer professional expert advice on navigating life as a newly formed business and can give personalised feedback on what we think is the right path for you. If you’re really unsure about whether to start as a sole trader or limited company, please get in touch with us. We’ll help you avoid any big mistakes or pitfalls and stay with you at every stage of the journey to help you make your business as successful and profitable as possible, no matter what route it takes.

Mark
Mark Munnelly
Mark is a Chartered Accountant with a career spanning 18 years with both top 10 firms and independent accountancy practices. His expertise covers all accounting disciplines and passion is partnering with clients to reach their business and financial goals, even under the most challenging conditions. He is Co-Founder of Cubed Consultancy. Today, Cubed have got 100's of clients from sole traders, charities and larger multi-site businesses. Feel free to click book a complimentary consultation session by click here or on the Consultation button above.
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