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Sole Trader or Limited Company?

Published on 9th October 2018

Whether you’re starting up or are thinking about revisiting your current structure, deciding between operating as a Sole Trader or a Limited Company can leave you feeling lost and confused. But, in truth, understanding the difference between these two terms isn’t as complicated as you may think. As a Sole Trader company, you’re classed as being self-employed and having a 100% equity stake in the business. Meanwhile, a Limited Company acts as its own legal entity but holds you and any other owners responsible for the business’ debts in relation to how much capital you’ve each invested. The difficult part is understanding what these two different operating structures entail and how they affect you in order to make an informed decision.

Complying with HMRC Tax requirements

One of the key areas that separate Sole Traders from Limited Companies is how they comply with HMRC Tax requirements. Should you choose to operate as a sole trader, you’re usually charged tax based upon your business’ profit, which must be fully resolved within the deadline they sent down in relation to the current tax year. Plus, the tax rate that your business is charged generally increases according to how much revenue you’re generating. For example, during the tax year running between 2017/18 affecting England, Wales and Northern Ireland, this stood at:

  • 20% - Revenue up to £34,500
  • 40% - Revenue between £34,501 - £150,000
  • 45% - Revenue in excess of £150,000

As a result, as your business grows and generates more income, continuing to operate as a sole trader might become financially challenging.

Yet, on the other hand, the process with a Limited Company works differently. In this case, as well as paying corporation tax (currently at 19%) which must be resolved within 9 months after the tax year, HMRC also taxes the earnings of your business’ directors using a Pay As You Earn (PAYE) scheme. Plus, unless your directors haven’t been paid and/or have claimed benefits, they must also fill in any relevant Tax Return forms, regardless of whether they’re owed tax or not. In addition, if your directors own equity (shares) in your business, any dividends they may have received (after the first £2,000) will also be taxed by HMRC.

For further advice tailored to your individual circumstances, it’s worth discussing your tax liabilities with a qualified business accountant before making a decision.

Are you classed as a Sole Trader or running a Limited Company? Need help raising enough capital to achieve your goals? Apply for Business Finance or learn more about how your business could benefit.

Accounting and managing tax returns

Another area where Sole Traders and Limited Companies differ is in regards to your business’ accounting processes. As a Sole Trader, you (and any associated partners) aren’t legally obliged to maintain and file annual accounts. Yet, nevertheless, taking it upon yourself to keep your accounts up-to-date will make it easier for you to track your business’ income and expenses - especially when completing tax return forms.

However, should you, instead, choose to operate as a Limited Company, you’re now required to prepare annual accounts that must be presented to HMRC and all of your business’ shareholders once the financial year concludes. Plus, you’re also obligated to complete and submit a Confirmation Statement directly to Companies House, alongside any relevant information.

Reputation amongst customers and service providers

Although operating as a Sole Trader involves a less complex structure, it’s worth noting that some contractors and agencies, depending on the sector, may not be willing to accept or provide services to your business. This is largely on account of how much legal protection they receive and the regulatory requirements involved - e.g. Customer Credit Act (CCA). Also, operating as a Limited Company helps to create an impression of reliability in the minds of your customers and any service providers you may be approaching. Though that may not always be the case, financial institutions often prefer offering finance agreements to Limited Companies, which could be problematic if you’re hoping to develop your business as a sole trader. However, there are funding opportunities available for both Sole Traders and Limited Companies, it’s just knowing where to look.

Need help supporting your business?

Whether you’re operating as a Sole Trader or Limited Company, you’re certain to run into any number of issues either way. It’s just knowing how to overcome these challenges in a manner which is suitable for your business’ structure and day-to-day operations. Yet, nevertheless, one of the most common issues you’ll face often involves the matter of funding. Although raising capital through traditional financial institutions may not always yield results, especially if you’re an SME, the Alternative Finance industry is opening up the doors to the UK lending landscape, regardless of whether you’re a Sole Trader or Limited Company.

At Rangewell, we’re an Access to Finance specialist, having mapped over 400 lenders to offer you an overview of more than 23,000 business finance products. Our services are free to use for SMEs and their advisors, and we’ll also guide you through the application process. So if you’re looking to raise capital for your business, apply for Business Finance today or find out more with Rangewell.


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David Harrison

David Harrison

Content writer
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