What is the distinction between a sole trader and a limited liability company (LLC)?

Every company, no matter how big or little, requires a legal framework. You can operate as a sole trader, partnership, or limited company, with the majority opting for the lone trader or limited company.

According to the Department of Business, Innovation, and Skills, there will be 3.5 million sole proprietorships (59%) in 2020, 2.0 million actively trading firms (34%), and 414,000 regular partnerships (7%) in 2020.

What is the definition of a sole trader?

A lone trader is a self-employed person who owns and operates their own firm. It's the most basic business form, which is presumably why it's the most common, and you can register as one on the gov.uk website (you'll need to do so for tax considerations).

What is a limited liability company (LLC)?

A limited corporation is a sort of corporate structure that exists independently of its owners (shareholders) and managers in terms of legal identity (directors). This holds true even if the company is governed by a single shareholder and director.

Advantages of being a sole trader

• Apart from an annual Self Assessment tax return, it's simple to start up and requires no paperwork.

• greater privacy than incorporated enterprises, whose information is publicly available through Companies House

Disadvantages of being a sole trader

• Sole traders have unlimited responsibility, which means there is no legal distinction between themselves and their firm - if the business goes into debt, the owner is personally liable.

• This means sole traders risk losing their personal assets if things go wrong.

• Raising capital can be difficult since banks and other investors favour limited liability firms. Sole traders' expansion options are limited as a result of this.

• The tax treatment of sole traders is not usually the same as that of limited corporations. When you reach a particular level of income, remaining a lone trader may not be as profitable.

Advantages of a small business

A limited corporation, unlike a single trader, is legally independent from its owner, who has limited liability.

This implies your personal assets aren't at risk; you're only at risk of losing the money you put into the firm.

In contrast to sole traders, who are not afforded the same protection, once you register a company name, no one else can use it.

Furthermore, limited Accounting firms are more tax efficient than sole traders in general, as they pay corporation tax on their profits rather than income tax.

As things stand, this provides a more favourable tax rate than the higher income tax rates, making incorporating a limited corporation more profitable. Furthermore, a limited corporation can claim a broader range of allowances and tax-deductible charges against its profits.

Disadvantages of a small business

Companies with fewer employees have more responsibility. The director's fiduciary responsibilities are what a limited company director must perform legally.

Going limited might be costly and time-consuming because of these additional duties, as you'll either have to deal with this extra paperwork yourself or engage an accountant.

Companies House can be used to obtain information about your company, which means that details on directors and earnings must be made public. This level of transparency may not be appealing to everyone.

Filing an annual corporate tax return, as well as annual accounts, are some of the new responsibilities.

You'll also have to pay a charge to incorporate; for more information, see our guide to forming a limited company.

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