Differences between Sole Trader and Limited Company

Before deciding on one legal structure or another, you must understand the characteristics of each option and the specific particularities of the business in order to decide which structure best suits your business needs. In this article, I explain the differences between the legal structures of sole trader and limited company in the UK.

Characteristics of Sole Traders in the UK

Sole traders in the UK are single-person companies that carry out an economic activity without registering with the Companies House. This legal structure stands out mainly for offering a fast constitution process and with reduced paperwork. You will only need to obtain the UTR number and pay the National Insurance fees and the corresponding taxes.

In comparison to other legal structures, they stand out in two matters. On the one hand, a sole trader carries out commercial activities under their own name, without creating a new legal personality. Thus, their liability is full. This means that the owner of the business will respond to the debts of the enterprise using their own personal assets.

Secondly, the corporation itself will not have to pay taxes, but its director must do it as a natural person. Therefore, instead of paying the Corporation Tax, they will pay the Income Tax and the corresponding National Insurance fees. In this article, I explain in detail the taxes that a sole trader must consider.

Characteristics of Limited Companies in the UK

A private limited company is the most common type of legal structure among British corporations. The main reason for its popularity is that it has a legal personality that is independent from the one of its owners. Due to this factor, its directors, owners and shareholders will have limited liability. This means that, in the case the corporation incurs into debts, each person will only contribute to cover them with the money they have invested into the business.

This legal structure also offers a number of other benefits. First, authorities do not require a minimum share capital amount to form the company. Secondly, the corporation will only need one director, so the creation of one-person private limited companies is allowed.

Finally, all private limited companies established in the UK must register with Companies House, the country’s commercial register.

Differences between Sole Trader and Limited Company in the UK

Legal Liability

As I explained in the preceding paragraphs, sole traders have full liability. On the other hand, the directors and shareholders of private limited companies have limited liability. Therefore, if you only take into account this factor, it is more interesting to choose this second type of legal structure.

Differences between Sole Trader and Limited Company: Taxation

Private limited companies must declare their Corporation Tax within 12 months of the end of the accounting period. This duty taxes the profits that a corporation has made in a specific fiscal year. In this article, you can check the different rates.

The sole traders, on their side, must pay the Income Tax. It is a levy that any person has to pay. The fee will vary depending on their annual income. Sole traders also must make advance payments on account towards the following fiscal year. For their part, members of limited companies must also pay it individually depending on the profits they have earned. In this website, you can check the different fees payable according to the income earned.

On the other hand, both types of legal structures will have to declare the VAT they have collected if their annual turnover exceeds 90 000 GBP (107 500 EUR).

Registering the Company

As mentioned above, sole traders do not have to register with the UK commercial register. They must sign up to get a National Insurance number and apply for the UTR number.

Private limited companies, however, by law, must register with the Companies House. To do this, the owners and shareholders must choose a business name that complies with the established rules, define the director or administrator, and draft the Memorandum and the Articles of Association.

In ukstartcompany, you will find information about how to establish, register and operate companies with different legal structures and business activities in the UK.