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Guilherme Mazui

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What is the Difference Between Sole Trader and Limited Company?

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The main difference between a sole trader and a limited company lies in their legal structure, ownership, and taxation. Here are the key differences between the two:

  1. Legal Structure: A sole trader is an individual who owns and runs their business, and there is no separation between the business and the individual legally. On the other hand, a limited company is a separate legal entity from its owners (also called shareholders), meaning that the owners have limited liability for the company's debts and obligations.
  2. Ownership: A sole trader consists of a single owner, while a limited company can have multiple owners and members/shareholders.
  3. Taxation: Sole traders pay Income Tax on profits and classes 2 and 4 National Insurance. Limited companies pay Corporation Tax on profits, which is typically lower than Income Tax, and no National Insurance. Limited companies also have the option to take a salary or dividends, or split take-home income between the two.
  4. Personal Liability: A sole trader has unlimited personal liability for the business's debts and obligations, whereas a limited company owner has limited liability, meaning their personal assets are protected from the company's liabilities.
  5. Privacy: Limited companies have less privacy than sole traders, as their accounts and confirmation statements are publicly available on sites like Companies House and DueDil. Sole traders do not have this level of public disclosure.
  6. Administrative Requirements: Limited companies typically have more administrative requirements, such as accountants, lawyers, a registered office address, and insurance, which can result in higher costs compared to sole traders.

Ultimately, the choice between a sole trader and a limited company depends on factors such as the type of business, future plans for growth, level of commercial risk, and personal preference. It is essential to consider the pros and cons of each option and seek professional advice when making a decision.

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  • What is the Difference Between Sole Trader and Limited Company?
  • Comparative Table: Sole Trader vs Limited Company

    • Comparative Table: Sole Trader vs Limited Company

    Here is a table comparing the differences between a sole trader and a limited company:

    Feature Sole Trader Limited Company
    Legal Structure No legal distinction between the individual and their business A separate legal entity, limited liability, and less personal monetary risk
    Taxation Income tax and national insurance contributions on profits Corporate tax on profits, may be more tax-friendly
    Public Transparency No public disclosure of information Requires disclosure of certain information, such as director names, to Companies House
    Personal Asset Protection Unprotected, sole traders bear all responsibilities and liabilities Provides limited liability, shifting liability to the company
    Business Growth Limited potential for growth and expansion Better suited for growth and high-risk industries
    Accountancy Costs Lower for sole traders, as they have simpler financial and tax reporting Usually higher for limited companies, due to more complex financial and tax reporting
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    Guilherme Mazui

    Guilherme Mazui is graduated in journalism from the Federal University of Minas Gerais (UFMG) and a master's degree in Communication from the University of São Paulo (USP). In addition, he has experience in advertising writing and has worked as a content editor in several companies.