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What’s the difference between a sole trader and a limited company? Check out our definitions, compare the advantages and disadvantages, and find out which legal structure best suits your business.
Every business, no matter how big or small, needs a legal structure. You can choose to be either a sole trader, partnership, or limited company – and most choose to be either a sole trader or a limited company.
According to the Department for Business, Innovation and Skills, in 2020 there were 3.5 million sole proprietorships (59 per cent of the total), 2.0 million actively trading companies (34 per cent) and 414,000 ordinary partnerships (7 per cent) in 2020.
Get your free in-depth guide, which explains the advantages and disadvantages of the different legal structures for a business.
A sole trader is essentially a self-employed person who’s the sole owner of their business. It’s the simplest business structure out there – which is probably why it’s the most popular – and you can set up as one via the gov.uk website (you’ll need to do this for tax purposes).
Read our guide on how to register as self-employed with HMRC.
A limited company is a type of business structure that has its own legal identity, separate from its owners (shareholders) and its managers (directors). This remains the case even if it’s run by just one person, acting as shareholder and director.
Wondering about being a sole trader or limited company and the pros and cons of each? After the video below, we run through the advantages and disadvantages.
As things stand this offers a kinder tax rate than the higher rates of income tax, meaning forming a limited company can be more profitable. In addition to this, there’s a wider range of allowances and tax-deductible costs that a limited company can claim against its profits
You’ll need to pay a fee to incorporate too – check out our guide to setting up a limited company to learn more.
Ultimately, you need to weigh up the difference between a sole trader and limited company, as the structure you choose could impact on everything from profits to paperwork. Don’t rush into any decision and speak to an accountant if you’re unsure, as their expertise is often invaluable when it comes to tax.
Elsewhere, investigate insurance – regardless of the structure you choose – as running either type of business will bring its own unique risks. Discover more on sole trader insurance and limited company insurance and find out a basic overview of what you'll need.
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