The most common corporate structure is a private company limited by shares, which are managed by directors and owned by shareholders. Private limited companies have a separate legal identity to their directors and shareholders. This is an important characteristic, as it means that shareholders’ liability for the debts of a private company limited by shares, is restricted to the amount unpaid on the shares held by them. Private companies limited by shares can be identified by the word “limited” or the abbreviation “Ltd” at the end of their name.
A sole trader enterprise is ultimately a business run by an individual in their own name or under a trading name. There is no legal distinction between the owner and the business. The individual who operates as a sole trader risks losing their personal assets if the business becomes insolvent, as the owner is personally liable for the debts and obligations of the business.
When deciding which business structure to use, there are some general advantages and disadvantages associated with both sole traders and limited companies.
Advantages of incorporating as a Private Limited Company
- The key advantage is that shareholders are only liable for the debts of the business up to the value of their share capital, meaning that their personal assets are kept safe
- Tax advantages can be gained, through effective remuneration and dividend planning
- Limited companies are legally registered and regulated, which could convey to customers that your business is professionally established, trustworthy and of a considerable size
- It is much easier to sell a limited company than a sole trader enterprise
- By incorporating, you are able to save your company name
- Capital can be raised by issuing shares
Disadvantages of incorporating as a Private Limited Company
- More information is publically available, such as the company’s registered office or names of the directors, shareholders and company secretary, meaning that limited companies have less privacy than sole traders
- Company details must be filed with Companies House, including the annual return and annual accounts
- Professional accountancy services are usually required to assist with the preparation and filing of accounts and tax returns
Advantages of remaining as a Sole Trader
- Sole traders do not need to register their business with Companies House before trading and can simply start trading or carrying out business activities
- There is less administrative paperwork associated with operating as a sole trader
- Sole traders are able to convert to a limited company at any point
Disadvantages of being a Sole Trader
- Sole traders do not benefit from limited liability, meaning that the owners of the business are personally liable for all business debts, for example the owner may have their house repossessed or their personal assets seized
- Your desired company name may no longer be available if you incorporate a limited company at a later stage
- It can be more difficult for sole traders to obtain investment or to borrow money for expansion
- If your sole trader enterprise is in the format of a partnership, you are also liable for your partners’ business debts
- With regards to reputation, sole traders are commonly owner managed businesses associated with a low level of turnover
- If the owner of the sole trader business were to die or become bankrupt it is unlikely that the business will survive
Ultimately deciding whether to remain as a sole trader or incorporate a private limited company can be difficult. The benefits and drawbacks can vary greatly depending on the specific circumstances of your individual business. If you require any assistance with regards to deciding which business structure to take or for more information on formation services, please contact our specialist company formations team.