Comparison of a sole trader and a limited company
This blog provides a comparison between a sole trader and a limited company, which are two different types of business structures. A sole trader, sometimes known as a self-employed person, is someone who carries on business in their personal capacity, whereas a limited company is a separate legal entity.
The following are the main points of comparison between the two:
Formation: A sole trader can begin trading by registering with HMRC, while a limited company must be incorporated by application to the Registrar of Companies at Companies House.
Legal personality: A sole trader is not a separate legal entity, while a limited company is a legal person, separate from its owners and directors.
Liability: A sole trader is personally liable for all of the debts and obligations of the business, while a limited company is liable for its own debts and obligations, and the personal assets of the members are not at risk, except in certain circumstances.
Ownership of assets: A sole trader personally owns the assets of the business, while a limited company owns the assets of the business.
Profit: A sole trader has legal ownership of the profits of the business and has absolute control over the use and distribution of profits, while in the case of a limited company, the profits belong to the company itself, rather than shareholders or directors.
Management and decision making: A sole trader has full control of the management and decision making processes of the business, while the day to day business of a limited company is run by its directors, who must act in accordance with the constitution of the company and UK company legislation.
Administrative requirements: A sole trader has fewer formalities and lower operating costs, while a limited company has additional administrative formalities in setting up and running the business, and certain information relating to the business is publicly available.
The choice of business structure depends on various factors, such as the size of the business, the nature of the business activities, and the degree of personal liability that the business owner is willing to assume.
