Ltd company or sole trader: which one should you choose

Starting up a brand-new business is a momentous and exciting milestone for any entrepreneur, so, firstly, we want to extend a virtual Coupay congratulations your way for getting to this point.

That being said, registering your new venture can be an overwhelming endeavour. Making multiple important decisions from day one of your new project can be challenging and can throw up a lot of questions.

One such question, when it comes to registering a new business, is whether to become a sole trader or a limited company. Ensuring you choose the most appropriate legal structure is important for the future of your business, especially when it comes to how you want to pay taxes and how you want to grow your business.

So, let’s start with the basics:

What is a limited company?

A limited company is a business with its own legal identity, separate from the owner or owners. That means, even if it is run by a single person, financial matters can remain slightly more separate for the limited company owner. 

The perks:

Limited liability: If you want to completely compartmentalise your business financials from your personal earnings, this is easier as the owner of a limited company.

Better tax rates: Generally speaking, paying corporation tax instead of income tax is a bonus and sometimes means having a limited company might lend itself to better profitability in the long run.  

Brand protection: Once you have registered your company name, no one else will be able to use it. This protection is exclusive to being a limited company owner.

The pitfalls: 

Extra accountability: As a limited company, you will have toadhere to legal duties laid out in the Director’s Fiduciary Responsibilities.

Less privacy: As a limited company, by default, you must be completely transparentabout business information and financials.Any business flaws will be searchable and in the public domain via Companies House.

What is a sole trader?

Becoming a sole trader means you are the sole owner of your business. In essence, it means that you are self-employed. Registering as a sole trader is the simplest legal structure, making it the most popular, and sole traders can register themselves with HMRC via the Gov.UK website.

The perks:

Easy set-up: It’s relatively easy to set up and register as a sole trader.

Less paperwork: Aside from your annual self-assessment tax return, there will be minimal paper admin in contrast with that of a limited company.

More privacy: Unlike with a limited company, company information or sensitive details won’t be accessible on Companies House.

The pitfalls: 

Raising funds: As a sole trader,it’s less easy to get an investoras a sole trader as they tend to favour limited companies.

Tax rates: When you reach a certain earnings threshold as a sole trader, tax rates can be less favourable than as a limited company. At a certain point, it may become worthwhile to make the switch.   

Sole trader vs limited company

So which one should you choose as a brand new startup?

Well, it depends on a number of different aspects such as what your business is, what your growth goals are, and the level of privacy you might want in terms of your financials.

Ultimately though, it’s important not to rush the decision. This should be a key part of your strategic plans, as there is a lot to take on board.

As a simple synopsis, it might be worth considering a limited company if you want to build and grow a sizeable business or if, one day down the line, you may want to sell the business.  

If you’re happy keeping things relatively small and simple as a one-man-band, registering as a sole trader will likely be the best option for now. Don’t forget you can make the switch further down the line if necessary.

For more functional advice and guidance on setting up your side hustle or startup, from our invoicing 101 to card machines and pandemic-proofing, check out our Coupay blog.