When setting up a new company one of the biggest decisions is how to set up your business and whether to go down the route of a limited company or not. There are a few key differences between trading as a sole trader and running a limited company with advantages on either side.

Setting up as a sole trader can seem far simpler, as creating a limited company involves a longer process, and the responsibilities in terms of finance and admin are greater when a limited company is involved.

However, running a limited company is often the favoured option because there are many advantages including tax issues and retaining independence from the company as a separate body.

We spoke to the experts of Crunch, a company that offers services like accounting for limited companies and they gave us a list of the key advantages of running a limited company:

  1. The tax advantages

If you run a limited company you will be required to pay UK Corporation Tax and are likely to pay lower tax than a sole trader. As a director of a limited company you can take most of your income as dividends which are not subject to National Insurance Contributions, so you can minimise the amount you will be required to pay.

As a sole trader you are subject to paying NIC so will end up paying more in personal taxes. There are lots of guidelines around the taxes required from limited companies so it’s always best to get advice from a professional accountant.

You can also fund pensions for your employees as a business expense which can help and offer another strong financial advantage when compared with sole trader businesses which can’t do this.

  1. Separation from your business

As a sole trader, you are your business and are treated as one and the same when it comes to all finance, tax and administrative issues – but this is not the case with a limited company.

A limited company stands alone as a separate unit from the business owner. The limited company will have separate bank accounts, assets belong to the business rather than the business owner and contracts are with the company. This can be advantageous if there are any issues with the business.

Some business owners feel that setting up a limited company is too expensive or too complicated however, you can get your accountant to run the whole process for you and having the separation of accounts actually makes running the business easier.

  1. Extra protection from financial issues

A business run as a limited company offers extra protection by limiting the liability of the owners. As long as no fraud has occurred the owner of a limited company won’t personally be held responsible for business financial losses.

It means running a limited company can provided you with extra protection if things do go wrong financially which is potentially a huge issue and not something to be taken lightly when deciding what business set up to go with.

  1. Industry requirement

In some industries it can be a requirement that they only work with limited companies because it can be seen as more professional than a sole trader. Larger corporations in particular may be more inclined to work with limited companies over sole traders so it can be a great advantage when trying to secure new contracts or new client work.

  1. Easier to secure business funding

As a limited company has distinct financial separation from the owners it can make it feel like a more secure option for lenders when it comes to business funding. So if you are hoping to secure investors or business loans in the future, being a limited company can provide a big advantage.

Conclusion

When setting up a new business there are many things to consider including the legal structure of the business. As you can see here, while setting up a limited company involves more administration and generally involves employing a professional accountant, overall it can provide a wide range of advantages.

While working as a sole trader can feel simpler, particularly at first, as a company grows it can be a distinct tax and financial advantage to have the degree of separation between you as an individual and the business you are running which only comes with setting up a limited company.

You should research all of the options before making a decision and speak to your accountant regarding all of the pros and cons. It’s also important to understand the administration requirements for setting up a limited company which includes coming up with your unique business name which will be protected in this set up.

As a sole trader you might find that someone else trades under the same name as you and you can’t really do much about that, unlike with a limited company which has its name protected legally.