What is a Sole Trader Company?
As is evident from the name, the sole means individual and sole trader business points towards a business or company run by a single owner. If you are the owner of a sole trader business, it means you are answerable to all the ups and downs that happen in the company. In a sole trader company, you need not share the business profits with anyone, and you are liable in case of a loss and business debts.
You cannot say sole trader and being self-employed is the same, they are distinctly different from each other. In a sole trader business, you are the boss of the company. When you are self-employed you need not be the owner or the boss always, it can be a partnership. But then it goes without saying that these two are related to each other.
Sole Traders are of different types, all types of freelance jobs can be listed under sole traders. Electricians, plumbers, writers, graphic designers, and photographers (to name a few) come under the sole traders’ category.
An online business can also be categorized as a sole trader business along with jobs like hair stylists, tutors, etc. A sole trader need not be always with a single owner, you can have other employees working under you.
There will be a different set of legal responsibilities when you are a sole trader and picking a name can also have its restrictions, legalities, and responsibilities.
Limited Company and An Explanation of What Exactly It Is
It is good to have a look at what exactly a limited company is and how it works to your advantage. A limited company can have one or more directors and shareholders this is one of the most popular company structures that exist.
A limited company is not restricted to its owners, it is responsible for its actions, unlimited liabilities, and finances. It can also enter into other contractual agreements with other companies on its own.
You can be both the owner and the director of the company, or you can have the company with yourself and other people. The owners of the company are protected by something that is called the ‘limited liability which means they are responsible for the business debts depending on the value of their investments. It can also be decided based on what they can show as their guarantees.
Difference Between Sole Trader and Limited Company
A sole trader and a limited company are not the same and there are a few things that set them apart from each other. As we know a sole trader is a company run by a single owner. It is up to this individual whether he/she wants to run the company with any other employees or hire someone to help.
The owner’s name will be used in the contracts signed and it is this individual who takes and makes decisions for the company. Everything that happens in the company falls on the shoulders of this individual owner, be it the loss that happens, the profit, or the debts incurred. This is the best way for small business owners and traders to get into business.
A limited company has shareholders who are protected by limited liability. Unlike a sole trading company, they will have employees, directors, shareholders, and officers in the company. The owners’ income is dependent on the dividends, while in a sole trading company it is based on the profits and the withdrawals.
The taxation of a limited company is decided based on the corporation tax and the taxation of a sole trader is decided based on the income tax payments of the company owner.
In hindsight, if you at the advantages of being a sole trader you can say it is easy to start and easy to shut down. There are fewer complications, and the company owner gets all the profits generated from the company.
Any owner of a limited company will have limited liability, larger capital, and it will be a registered company that will last for a lifetime. The startup time for a limited company can be longer and more expensive.
If you are the sole trader of a company, then in case of any debt, you are liable for it since there is no other partner. Paying the creditors will be tough and personal stuff like cars and houses will be used to pay off the creditors. The creditors can be repaid the assets of the company when it comes to limited companies.
The disadvantages of being the owner of a sole trading company are risks are more and it will be difficult to get a good loan for their capital. A limited company on the other hand will be more complicated in terms of accounts, employees, paperwork, and responsibilities. They require transparency when it comes to their accounts.
In case of the death of the owner of a sole trader business, the business can either end or it can be transferred completely or partly to someone else who is interested in running the business. In a limited company, the death of the director does not directly affect the company. The company will still exist.
Limited companies have better tax rates compared to that of a sole trader. They have expenses that are allowed and that enables them to reduce their tax bill. They will have more paperwork when compared to that of a sole trader business.
A sole trader company has just an annual tax return policy which gives them more privacy. Investors find limited companies more attractive to invest in than a business where there is a single owner.
Conclusion
The choice of being a sole trader or a limited partner in a company is a choice you must make. All the tips above will help you in your decision-making, whether to start an individual business or be a partner. There are ways to change a sole trader company to a limited one and switching to a limited company will help you save tax. It will also be beneficial from a commercial and legal point.
