Sole Trader vs. Limited Company in the UK: What to Choose?

Entrepreneurs setting up companies in the UK have a dilemma. They may register as sole traders or become directors of limited companies. Aside from involving different authorities (Companies House and HMRC), these formation types have taxation and liability differences. Which to choose in 2022?

Thanks to remote UK company registration services, business registration is a breeze for residents and non-residents alike. You can delegate paperwork to an agent and get the result in around 5 business days. Services for limited companies also include a business bank account and an app. Here is why an Ltd. could be the best choice for your enterprise:

Comparison of Personal Liability

The biggest argument against becoming a sole trader is personal liability. If your business goes under, your personal assets like real estate and vehicles may be used to cover its debts. In a limited company, personal and corporate funds are completely separate.

What’s more, the owner of a limited company may also act as its only director and shareholder. Registration through an agent is quick and simple: they will submit your application to Companies House, set up a business bank account, and provide an app for cash flow management.

Pros and Cons of Sole Trader 

Sole traders only need to register with HMRC. This means their companies do not appear on the Companies House database. Taxation is also simple as only the annual Self Assessment tax return is required. The drawbacks are: 

• Personal liability is unlimited. 
• Raising capital is more difficult, as institutions and private investors approach sole traders with caution. 
• This model is less tax efficient: once your company reaches a particular level of profitability, it pays more tax compared to an Ltd. 
• The absence of Companies House registration means that another business could use your name.  

Reflecting on such things can also help you when the firm is going through a crisis.

Pros and Cons of Limited Company 

Even if a limited company files for bankruptcy, its owner may not be held personally liable. Their assets are protected. The only money they can lose is the amount they invested in the business. Other advantages include:

• Protection of your business name. Every name registered with Companies House is unique. Close resemblance to other names is also prohibited. If you want additional protection, register your brand as a trademark.  
• Tax efficiency. Limited companies pay corporation tax on profits instead of income tax. Their range of tax-deductible costs is also wider.

The biggest problem with Ltd. is the need to comply with requirements for incorporated businesses. These include:

• fiduciary responsibilities of director(s); 
• annual company tax return;
• annual accounts.

Unless you enlist the help of an agent, registration will involve a substantial amount of paperwork. Mistakes in applications lead to delays. Finally, your business name will show up on the official database, so you will not enjoy the same privacy as sole traders.

To Conclude

If you want to protect your personal assets and company name, set up a limited company. This model will bring tax savings in the long run, and you can also become the only director, owner, and shareholder of your business. Remote services are quick and hassle-free. Register your company name and set up a bank account in a week!