Limited Company vs Sole Trader: Understanding Your Business Structure
You’ve had the big idea, perfected your product, and now you’re ready to operate.
But before you can launch into running your own successful business, it’s vital to understand your company’s legal structure and your legal responsibility for its finances.
If you’re getting ready to register your business, here are the basics of what it means to operate as a limited company or sole trader, and which business structure might be best for you.
What is a Limited Company?
A limited company is a separate legal entity from you. This means that your personal finances must be separated from the business, and profits made belong to the company.
If you start a limited company, you’ll serve as director of the business. Limited companies can consist of one person or employ staff, but importantly, your business’ liabilities will not be considered as part of your personal finances.
You’ll act in your company’s interests as director of a limited company, meaning there are rules in place to make sure you’re using company funds to pay salaries or dividends. Taking money from the company for something other than this will be considered a director’s loan.
What is a Sole Trader Business?
Being a sole trader means that you run your own business as an individual and are self-employed.
Unlike limited companies, your business isn’t considered a separate legal entity from yourself. While this means you keep all of the profits after tax, it also makes you personally responsible for any losses your business makes.
If you decide to operate as a sole trader, it’s essential to keep on top of your business operations, as you will be personally liable for your business. The sole trader is the most popular type of business in the UK – it’s simple to register, and being a sole trader offers you the freedom to run your business exactly as you want to.
Which Business Model is Better?
There are pros and cons to each of these business models, and different tax rules apply to each structure.
The key difference between a sole trader and a limited company is your personal liability. If you’re operating as a limited company, for example, you’ll need a business bank account to separate your personal and company finances.
Keeping Track of Your Accounts
However you choose to run your business, organising your finances efficiently is key to keeping both your business and personal finances running smoothly.
Hiring an accountant gives you more time with your business. If you’re excited to get your company off the ground and spend more time with the idea you love, leave the books to Origo.
Whether you’re a sole trader, a limited company, or preparing to launch your start-up, take a look at our services to see how we can help you.