At Alton & Co, we understand that selecting the right business structure is crucial for your venture’s success. The decision between operating as a sole trader or forming a limited company can significantly impact your tax obligations, administrative responsibilities and overall growth potential.

This blog will compare these two popular business structures, considering the latest economic developments and relevant statistics.


Sole trader: simplicity and control

A sole trader is the simplest form of business structure, ideal for individuals starting small operations. As a sole trader, you have complete control over your business structure and its decisions and retain all profits after tax. This business structure is straightforward to set up and requires minimal administrative work.


Pros of being a sole trader

  • Ease of setup and minimal costs: Registering as a sole trader is quick, with minimal paperwork and low initial costs. You can start trading almost immediately.
  • Complete control: As a sole trader, you have full authority over business decisions, allowing for swift and flexible responses to market changes.
  • Profit retention: All profits after tax are yours to keep, providing a direct incentive for your hard work and success.
  • Simple taxation: You only need to file a self assessment tax return, and the accounting requirements are less complex than a limited company.


Cons of being a sole trader

  • Unlimited liability: You are personally responsible for any debts or legal actions against your business. This means your personal assets are at risk if your business faces financial difficulties.
  • Tax efficiency: Sole traders can face higher tax rates once profits exceed certain thresholds. The current income tax rates for sole traders can reach up to 45% for earnings above £150,000.
  • Limited growth potential: Securing investment and funding can be more challenging for sole traders. Potential investors may prefer the structure and perceived stability of a limited company.


Limited company: growth and protection

A limited company is a separate legal entity from its owners, providing protection from personal liability. Businesses often prefer This business structure to scale up, attract investment and benefit from potential tax efficiencies.


Pros of a limited company

  • Limited liability: Shareholders’ personal assets are protected, as they are only liable for the amount they invest in the company. This reduces personal financial risk.
  • Tax advantages: Limited companies can be more tax-efficient, with corporation tax currently at 19% on profits up to £250,000. Directors can also use tax planning strategies, such as paying themselves through dividends.
  • Credibility and growth: Operating as a limited company can enhance your business’s credibility and make it easier to attract investment. It signals to clients and partners that you are serious about your venture.
  • Perpetual succession: The company continues to exist even if the ownership changes, providing stability and continuity.


Cons of a limited company

  • Increased administrative responsibilities: Running a limited company involves more paperwork, including annual accounts, corporation tax returns and Companies House filings. This can be time-consuming and may require professional assistance.
  • Costs: Setting up and maintaining a limited company can be more expensive due to registration fees, accounting services and legal compliance.
  • Public disclosure: Limited companies must disclose certain financial information, which becomes publicly accessible. This may not be desirable for all business owners.


Current economic considerations

With inflation and changing tax policies, the decision between a sole trader and a limited company is more pertinent in the current economic climate. Higher inflation can affect business costs and pricing strategies, impacting profitability and cashflow.


Making the right choice

Ultimately, deciding between operating as a sole trader or forming a limited company depends on your business goals, financial situation and personal preferences. Here are some key questions to consider.

  • What are your long-term goals? A limited company may be more suitable if you aim to grow your business, attract investors or sell your company.
  • How do you feel about risk? If you are concerned about personal liability and protecting your assets, the limited liability feature of a limited company offers peace of mind.
  • What is your expected profit level? Consider the tax implications of each structure based on your anticipated earnings. A limited company may offer tax efficiencies for higher profit levels.

At Alton & Co, we are here to help you make an informed decision. Our team of experienced accountants can provide personalised advice tailored to your specific circumstances. Whether you choose to operate as a sole trader or form a limited company, we will support you every step of the way to ensure your business thrives in the current economic environment with the business structure that is perfect for you.

Choosing the right business structure is a vital step in your entrepreneurial journey.

Contact us today to discuss your options and find the best solution for your business needs.