What is the difference between a sole trader and a limited company?

What is the difference between a sole trader and a limited company?

When setting up your company and becoming self-employed, you will have to decide whether to be a sole-trader (or partnership if there is more than one of you involved) or become a limited company.

The decision can be a difficult one but the choice depends upon:

• The type of work you plan to do - becoming a limited company can give you status, protection and credibility. Sole trader status is suitable for small independent companies that do not have a big turnover, or that have few expensive assets. It is ideal for designer makers, photographers etc. Most companies will start out as a sole trader and change status as the company grows

• The size of your company and forecast turnover - one argument for becoming a limited company is that you should be making a profit in excess of £30,000

• Do you need security? If you have major clients and large budget contracts, then you need the security that a limited company can provide. As a limited company, should you be liable for a contract that goes wrong and there are debts, you and your personal assets are protected because it is the company that is accountable.

Establishing a Limited company requires more formalities to be observed. This includes the filing of memorandum and articles, keeping the company registrar up to date with changes, and filing an annual return. Formation also requires the company accounts to be open to public inspection. All companies must file annual accounts with the company registrar. This involves additional costs because you need to use an accountant, however accountancy fees are tax deductible.

It is not necessarily expensive to set up a limited company. On-line company formation companies can provide you with all the necessary documentation and register your new company with Companies House (a legal requirement) for less than £100.

Note: If your company is a not-for-profit organisation and social enterprise that will work for the benefit of the community, then you may wish to consider becoming a Community Interest Company (C.I.C.). Check www.cicregulator.gov.uk for more information.

Roy Jones 2006