When deciding which structure would best suit an enterprise several factors should be considered:
- Cost of running the company
- Limitation of liability
- Tax benefits
- Number and nature of stakeholders
Most new business owners choose to set themselves up as either a sole trader or limited company. But what are the benefits and limitations of each?
Sole trader
Benefits |
Considerations |
| Easy to set up with little outlay. | Sole traders are personally liable for any debt if something goes wrong. |
| Any profit made is trader's income. | Can find it more difficult to raise finance and may need to provide a personal guarantee. |
| Must file a tax return at the end of each year, but this is usually a relatively straightforward process for an accountant. | If profits exceed £40,000 tax liabilities may be slightly higher than a limited company. |
| Overall cheaper to administer than a limited company. | Class 2 & 4 National insurance payable on profits. |
Guide: sole traders and tax
ICAEW has created a downloadable guide for those considering becoming a sole trader on the tax implications and the need to notify HMRC.
Limited company
Benefits |
Considerations |
| A limited company is a legal entity separate from its owners, which reduces personal liability. | There is a small fee to register with Companies House. |
| Owners, and any other shareholders, are usually paid dividends as income. Shares can be sold to raise capital. |
Limited companies need to file accounts with Companies House and HMRC, and directors need to complete personal self-assessment tax returns. |
| Shareholders can be added or ownership transferred without affecting the management of the company. |
Accounts and taxation are more complete and an accountant will be needed to help complete and file them. |
Guide: limited companies and tax
ICAEW has created a downloadable guide for those considering becoming a limited company on the tax implications and the need to notify Companies House.
Other options
The initial choice of business structure isn’t binding. A business can start out as a sole trader and later register as a limited company when turnover increases, for example. Of course, these are other business structures to consider.
Partnership
If two or more people run a business together as partners, they share profits, losses and unlimited legal liability. It’s important to draw up a partnership agreement to make sure all parties understand their responsibilities and how profits/liabilities will be split. This requires specialist accountancy and legal support.
Limited Liability Partnership (LLP)
An LLP operates more like a limited company, in terms of the partnership being a separate legal entity with all partners having limited liability (which depends on the amount they have invested in the business). Accounts are required by Companies House but taxation follows the rules for partnerships ie, partners pay income tax and NI on their share of the profits.
Social enterprise
If your client’s business will benefit the community, they could opt to set up a Social Enterprise. These can be profit making and can be structured in a number of ways, from a co-operative or charity to a limited company.
- More about setting up a Social Enterprise (gov.uk).
Employee ownership
With employee ownership, all employees have a ‘significant and meaningful stake’ in the business through holding shares (either personally or in trust) and having a say in how the business is run.
Tax implications
ICAEW has published two guides explaining tax implications of become a sole trader and a limited company.
Sole trader and taxLimited companies and taxAdditional support
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