Every business owner has to decide on the structure of their business. The options available to an entrepreneur generally come down to sole proprietorship and a limited liability company (LTD). Both of these company structures have certain pros and cons that you need to understand to make the right decision.
Here we will explain and compare the differences between a limited liability company and sole trader so that you can proceed accordingly.
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Members
In a sole trader business, you are the sole member of that business. You may employ others including your family members and relatives, but they cannot be listed as a participating owner of the business.
In contrast, limited liability companies can have more than one owner. Members can be individuals or other limited liability corporations.
Most states require at least two members for a limited company. But some states, such as the UK, allow one member to form a limited company. You will see more information about company formation on our website.
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Liability
One of the biggest benefits of forming a limited liability company is that the company rather than the members is liable for business obligations. Personal assets – such as your car, home, and financial accounts will not be used to clear company debts.
In contrast, a sole trader is personally responsible for all the liabilities of the business. There is no legal protection for lawsuits and debt collection. You will be on the hook to settle all liabilities related to your business. This can be a particular concern if you are in a high risk business that can give rise to claims against you for damages.
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Taxation
Sole traders have to submit Self Assessment tax returns when filing taxes each year. Limited companies have to file Corporation tax returns. Directors and individual shareholders have to file self assessments which are completely unrelated to the Corporation Tax returns filed by the companies in which they are shareholders.
HMRC (Her Majesty’s Revenue and Customs agency) sees a limited liability company as a separate entity. This means that the business income of a company and owners are taxed separately. In contrast, the business income of a sole proprietorship is considered personal income that is taxed accordingly.
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Capital
You have more options to raise capital if your business is registered as a limited liability company. You can raise capital to finance business operations by listing shares. Members who buy the shares become shareholders of the company. In contrast, sole trades have limited options for raising capital to finance business expansion activities.
So, which is better: a sole proprietorship or a limited company?
The answer will depend on your business objectives. However, a Limited Company is the overwhelming preference of most business owners as there is no liability for a business owner to pay company debts or other obligations that might arise from accidents, injuries, and lawsuits.
Remember that the structure that you decide for your business will have significant consequences. The protection of personal assets, taxation, and the reporting and compliance requirements differ for each business structure.
If you have any questions regarding the formation of a company, our website has all the information you will need. Alternatively you can email us or use our chatbox for additional help.