What is the difference between a Limited Company and Sole Trader?

Have you decided to venture out a business idea? Are you not sure if you should start a limited company or as a sole trader? You must understand the size and nature of the business you want to launch.

They are two critical, decisive factors. Besides, both of them have their pros and cons. They are going to have different operational structures, which should be clear to you. 

For you, it is crucial to point out the differences. This will let you know the structure that is best fitted for your condition. Moreover, the financial investment aspect needs to be analysed.

Determine how much you must provide from your cash reserve. Now, if you are planning to open a limited company, you can even get financial support. Figure out the amount that you need to plug the funding gap. 

Based on that, you can apply for limited company loans. Search for the available options easily or you can contact a business broker as well. Do not exceed the bearable borrowing limit!

Otherwise, you will get stuck in the trap of debt. Overcoming it would be difficult since you have to allocate the available funds to different areas. Now, the whole experience would be diverse when you plan to become a sole trader.

Find out the inherent differences between the two structures. Just go through this blog at your convenience.

Limited Company Vs Sole Trader

You will be able to differentiate these two based on the advantages and disadvantages. When you and your small business are one entity, you are a sole trader. This is even from a legal perspective.

Now, when you turn your business into a limited company, it becomes a separate entity legally. In both ways, you can enjoy some pros and cons which you cannot deny.

Who is a sole trader?

You are the business owner, and you can be the sole trader. All the responsibilities and authorisation will be on you. You will be the one who will have the outright ownership. 

When you are a sole trader, you are basically a self-employed person. You have a business that is still in the process of being built. Since every duty is on you, managing things altogether might be a little difficult. 

You will be able to ideate everything about a sole trader, including its advantages and disadvantages.

Benefits of being a sole trader

Your company is still small and growing when you are operating as a sole trader. Thus, you can keep aside the complexities that you might have to deal with in a limited company. You do not have to face less hassle while managing the administration.

This is because you and your company are the same. There is no need to spend a lot of money and time managing the business, which is still stabilising. Thus, if you have doubts regarding your administrative skills, being a sole trader will be beneficial.

You can even rely on various applications to take care of the admin-related tasks. In certain scenarios, this business structure lets you downsize the tax cost. Take advantage of it when your business generates less profit. 

Setbacks of being a sole trader

Handling limitless liability will be a tough job when you are a sole trader. If you have insurance, you can cash in on it. However, there are certain situations when this may happen.

You, as a sole trader, cannot pass on your business to your successors. 

What is a limited company?

This is a separate entity from its proprietors. Here, you might not be the only owner. There can be multiple owners and shareholders at the same time. 

Your company might include other members. Thus, unlike a sole trader, when you have a limited company, your responsibilities will be limited. It will be divided between different members who are associated with this company.

The extent of your responsibility will be equal to the size of the stake in the business. The more you own, the more your responsibility will be. Nevertheless, it is not that a single owner cannot run a limited company. 

In this case, the operations will remain the same as those of a sole trader. Here, the company and owner will still be different entities according to law.

Benefits of running a limited company

The value of your shares will decide the extent of liability you will handle. If you are the director or any prominent member of the company, you have the power to become a guarantor for loans. Running a limited company is more beneficial from a tax point of view. 

The possibility of an increase in tax benefits has become quite low. However, the best part is that passing on legacy is quite possible when you have a limited company. You can even think of selling off the business.

Setbacks of running a limited company

A lot of administrative tasks need to be completed. Accounting becomes more complex, and you will need to hire an expert. You can even seek assistance from various tools or applications.

However, managing these tasks would require you to shell out a lot of money. If you know how to deal with these tasks, there is no problem. Because of the first year of loss in business (if it happens), you can claim a tax refund. 

This should not be repeated in the later years. You must be mindful of the setbacks before deciding to move from one structure to another. In general, the launch of a business should be done as a sole trader.

Later, depending on the advancement of the business, you can consider whether you should become a limited company or not. 

The bottom line

No matter if you want to set up a limited company or operate as a sole trader, some funding solutions will still be accessible to you. One of them is Crowdfunded business loans. Based on the financial condition of your venture, you can apply for a suitable amount.

Ahead of borrowing, make sure that enough revenue can be generated before repayment. It would be better not to apply if you are confident about the possibility of loan repayment. For more such infromative articles, visit here.