Liverpool Invest

Sole Trader vs Limited Company

What is best – operating as a sole trader or a Limited Company? Many property experts and landlords choose to go the company route, but actually many combine both of these approaches.

Sole Trader vs Limited Company – A Brief Introduction

In summary, sole traders may suit people who are starting out and don’t require more than one employee to run their company or have any significant capital investment but on the other hand they will not get preferential tax rates that Limited Companies do. However it is worth considering both options as there can be many benefits to each approach depending on your specific circumstances.

If you are a sole trader, then there is no specific requirement for the person to be an authorised share holder. You would submit annual tax returns called a ‘Self Assessment’ where you need to declare business and property income. However if your sole trade involves many transactions and/or high amounts of capital investment, it may make sense to work with a Limited Company instead.

What is a Sole Trader

A sole trader is a person who has an independent trade or business, and the term derives from English common law meaning one master but no apprentice. Sole traders are self-employed people with unlimited liability for their debts and they have to register as such in order to operate legally on their own account. There are two main types of sole trader in the UK – sole proprietors and general partners.

A sole proprietorship is the most common form of sole trader with 30% of all UK businesses being sole-proprietor. This means that they are self-employed people who run their own business, but do not have any employees or other owners involved in the company’s running – this has to be registered as sole-proprietorship.

A general partnership is a sole trader structure which has two or more partners, and this can be set up by an agreement between the people involved with shared liability for debts – there doesn’t have to be a written contract in order to make it valid under English law.

What about a Limited Company?

A limited company on the other hand is a slightly more complex structure with many similarities to sole-proprietorship in the UK. This type of company can be owned by shareholders, who may also be employees – this means that they are not self-employed and instead have some form of employment relationship with the limited company or its owners.

Sole trader vs Limited company

It is often a common misconception that sole traders are the only option when starting out in business. Sole traders have sole liability for their debts – meaning that if they don’t pay what’s due then this will come from their own personal assets, such as money and property. Limited companies on the other hand have shared liability for debts with limited exposure in terms of personal assets.

In the eyes of HMRC sole traders are taxed at a much higher rate than limited companies, and sole traders also do not have certain benefits in the world of property – such as being able to offset their interest only mortgage payments as expenses. This has been phased out by the UK government over the last few years but sole traders are still at a disadvantage.

How do you set up a Limited Company in the UK?

The first stages of setting up a property company are:

  1. Take legal and financial advice to assess your circumstances
  2. Setup the company with Companies House using this government link to help you: https://www.gov.uk/set-up-limited-company
  3. Setup your LTD company bank account (I chose Starling because it is Free)
  4. Secure startup funds (investment, directors loan or startup loan)

You can also read our more detailed article on setting up a property company.

Overall Conclusion – Sole Trader vs Limited Company

In conclusion sole trader and limited company have many differences but there can be pros and cons to both of them, with sole traders being more risky as they carry sole liability for their business debts. What is clear though is that the sole trader model has been phased out by the UK government in favour of the limited company model. Remember to always get legal advice and input from a professional accountant on how to set up your business.

Sole Trader vs Limited Company

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