Limited versus sole trader

Limited company or sole trader…here’s why it’s easy for you to decide!

It’s probably your second big decision after the name of your business – whether to be a limited company or sole trader.

There are pros and cons to both and, whilst there will always be exceptions which I am happy to address with you, my big preference is for my clients to set up as a limited company.

Here are my six Golden Rules as to why:

1. Tax and National Insurance 

As a director of a limited company the most efficient way of withdrawing money from your company is by taking out a small salary and the remainder as dividends. Dividends attract less tax and you do not have to pay National Insurance contributions, but you are still entitled to State benefits, where applicable. In short, you are maximising your income opportunity, whilst diminishing your tax liabilities.

2. Greater credibility  

In my experience, larger companies and suppliers simply prefer to work with incorporated businesses. They are looking for credibility and there is no better way than to be registered on the Companies House official public register, I believe. 

3. Legal protection  

As a limited company is a separate legal entity to its directors and shareholders, this means as a director of a limited company you will have a limited liability for any company debts. It is usually capped at the amount you paid for the shares together with unsecured loans provided to the company. So should the company end up in trouble, the director will not be personally liable for the financial losses (unless fraud is involved). However, be warned – this is not the case when you are a sole trader: you can still be personally liable for the debts. 

4. Trading name 

Once you have registered your company on the Companies House website, the name is protected and there can only be one limited company with the same or similar name in the UK. This sort of protection does not apply to sole traders and someone else can still use your name. 

5. Future-proofing

Registering with Companies House might be also an easy way to secure a name for your future business – you can set up a dormant company (a company which is not trading yet) to protect your trading name until you are ready to start your business. You will only need to file a set of very simple dormant accounts once a year. 

6. Easier finance 

I have found that if you are a limited company then it is often easier to secure finance for your growing business, and you are also able to raise capital by issuing new shares to existing shareholders or new investors. You do not have this option if you are a sole trader. 

So, to me there is a pretty compelling case to register as a limited company. And the good news is that Foster Chapman is here to make the process of doing so simple and stress-free.


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