Choosing the right trading vehicle is an important consideration when starting a business.
Limited companies and sole trader businesses have both benefits and drawbacks and a decision is likely to be made after deciding which of these positives and negatives carry higher weighting for the individual concerned.
Some of the prominent differences between the two types of business entity are described in the following table below.
Most UK companies have limited liability which protects the owner’s personal exposure from the debts which the business might incur.
In the event that the company is unable to meet its obligations, the shareholders could not be called up on to pay monies from the own assets
Sole traders enjoy no such protections. Any debts which the business can not satisfy must be borne by the owner even if this means that they have to sell their personal belongings.
Companies are often viewed as more tax efficient trading vehicles particularly in situations where less than all of the income is paid to the owners.
This is common where the business might retain some profits in order to buy stock or other assets for the future.
Where this occurs, the owner of the company is taxed only on the amount they receive from the company.
In the case of sole traders, they are taxed on the full amount of the business’ profit irrespective or whether any was actually paid to the owners.
Thus they could potentially receive a high tax charge even though they received little or no salary from the business.
The death or retirement of a shareholder does not affect the existence or life of the company.
Where a sole trader dies or retires, the business is deemed to have ceased and therefore does not have the same continuity as companies.
Flexibility of Transfer
Shares in a limited company can be transferred relatively easily by the completion of a stock transfer form or a SH01 Form (formerly 88(2)) document.
Transferring part or all of a sole trader business is likely to involve solicitors in order to define the stake which is being relinquished.
Degrees of Formality
Limited companies have an inherently higher degree or formality attached to them.
In additional to registering at Companies House, they are also bound by the requirements to prepare and submit an annual return and yearly accounts.
These provisions are applicable even if the company remains dormant throughout its life.
Sole traders are not bound by the requirements to prepare formalised accounts or complete an annual return.