I believe one of the unexpected benefits to come from this pandemic has been the drive into the areas of entrepreneurships, with loads of new businesses popping up aiming to fill the new gaps emerging in the market. The issue a lot of entrepreneurs face, however, is finding out how exactly to begin. Whilst the UK government website covers all the information regarding starting up a new business, sometimes the wording can be quite obtuse, and making a decision on something so permanent about your new business can be daunting. In this article I will try to break down the differences between registering as a Sole Trader or a Private Limited Company (PLC).
What is a sole trader?
A Sole Trader is one of the simplest forms of business registration. Sole traders have a sole beneficial ownership and can start and trade in their own goods or services, whether that be a website, personal trainer, mechanic, entrepreneur and so on into other business climates. While being registered as a sole trader you can be self-employed or work for another company. In short, you have full control over what you want to do with your business.
What are the advantages of being a sole trader?
One of the main benefits of registering as a sole trader is how simple the process is; thankfully the UK government has always wanted to support entrepreneurs and remove unnecessary barriers in starting up your new business. This has allowed for sole traders to have very little paperwork to do other than your annual self-assessment, which makes for an easier experience and a smoother learning curve to setting up your business, which is especially of benefit to those who are new to starting a business.
A further benefit to those who are newly starting a business and are concerned about privacy (or don’t have a designated business address yet) would benefit from registering as a sole trader as your information doesn’t need to be publicly registered to Companies House. This is the UK Government’s official registrar for companies. The main functions of this organisation are inspecting and maintaining all the information on limited companies which they keep free and available to the public, making the UK one of the most transparent way for everyone to follow the ownership and legitimacy of any registered company in the UK.
This also adds a second benefit of having less restrictions on the specific location of the business meaning it’s beneficial to those aiming at building an international digital only business, as these styles of businesses have grown in popularity in the ever digital world we find ourselves in.
In regards to income and tax, registering as a sole trader has the benefit of not having to pay tax on any income below the personal tax allowance (Which for 21/22 currently stands at £12,570) which gives someone with a slow, long-term business plan time to build and grow before having to worry about the tax element of it.
The simpler start-up for being a sole trader also allows for experimentation of business ideas without having to go through the whole process of registering until you are sure it is an idea you will want to progress with. This can allow for a less pressured environment for new entrepreneurs to get started in and is aided in the simplified process for closing down your business as a sole trader.
What are the disadvantages of being a sole trader?
As with any decision in life, there are some disadvantages to every choice. One of the primary disadvantages of being a sole trader is the liability aspect. As the sole owner of the business all financial and legal liability is one you, meaning if your business ends up going into debt, you as the sole trader will be liable. Of course, with proper management and financial planning, issues like this can be uncommon, but it is a key distinction between this and being a Private Limited Company (PLC) which is important to consider.
As your company starts to grow and you are paying tax on your earnings as a sole trader, the costs can soon add up. This is where the major drawback of being a sole trader with a larger business that you are running is, the tax bill. The way UK tax law is set up gives lower tax rates to registered companies than to that of being a sole trader.
One of the final main drawbacks of registering as a sole trader is that it can limit your growth and future investment opportunities as most investors prefer investing in registered companies than into a sole trader business. This can in part be down to the limited borrowing power you might possess. As a sole trader any loans or investments you aim to secure will be put against your own individual credit rating and assets.
What is a Private Limited Company (PLC)?
The key distinction of the Private Limited Company from the aforementioned sole trader is the registration as a PLC defines your company as a distinct legal and financial entity. According to the latest statistics from the House of Commons Business Statistics there were around 3.5 million sole proprietorships (59%) in the UK at the start of 2019 and 2 million limited companies (34%). Despite the majority of registered businesses being sole traders, the general size of the business and the amount of profit is a lot larger in PLC’s.
When a person registers as a PLC they become the director of their company and also assign shareholders of the company as well.
What are the advantages of registering as a Private Limited Company (PLC)?
As alluded to in the above section, the creation of the business as a distinct legal entity has many benefits. The first of which being the liability of debt. In the ever changing world of business it can be encouraged to take risks on investment which whilst producing success in some cases it can cause financial difficulties for the company in the short term as they try to recoup their losses. By having the debt in the company’s name it can reduce personal stress on the director and shareholders. This can also allow better rates of debt consolidation as business debt is viewed differently to personal debt.
Another positive of registering as a PLC is the tax benefit involved. The current UK corporation tax rate is currently set at 19%. In the UK corporation tax is a tax paid on the profits of your business. This includes profits from supplying goods and services, investments, or selling assets for above their original worth (sometimes called chargeable gains). This lower level of tax can allow you to keep a greater share of your profits than when registered as a sole trader.
Another tax benefit which can be gained through registering as a PLC is through how you receive your money. As a director you can choose to take your payments in the form of dividends. According to Wikipedia a dividend is: “A dividend is a distribution of profits by a corporation to its shareholders. When a corporation earns a profit or surplus, it is able to pay a proportion of the profit as a dividend to shareholders. Any amount not distributed is taken to be re-invested in the business.” Whilst HMRC does assign a base tax rate to dividend payments it can work out lower to receive your income through dividends and pay yourself a relatively small salary to legally minimise the amount of tax you are required to pay.
As mentioned in the disadvantages to sole traders, sometimes being a registered company with a public record adds to the professionalism of the company to the public and to possible investors. It can also be when trying to collaborate or work with larger companies or suppliers, they will only allow registered companies to work with them.
Probably the last main advantage of registering as a PLC is the protection of the naming of your company. Once you register at Companies House your company’s name is legally protected, which stops trading under your name or under a similar name. This can allow for greater legal protection when it comes to brand identity and future growth.
What are the disadvantages of registering as a Private Limited Company (PLC)?
In contrast to the simplicity of registering as a sole trader, registering as a PLC is quite a bit more complicated. As a director of a PLC you have certain responsibilities. The UK Government website lists these as:
- Follow the company’s rules, shown in its articles of association
- Keep company records and report changes
- File your accounts and your Company Tax Return
- Tell other shareholders if you might personally benefit from a transaction the company makes
- Pay Corporation Tax
Whilst all these terms can be daunting to someone new to the world of business there is a plethora of information available online on the above government website.
Another disadvantage of this is also the longer registration process, this process needs a lot more information from you about the business to register and also carries a cost. Whilst as the director you have the responsibility to do all this and get it right, you are able to hire accountants or business managers to assist you in this.
The final main drawback from registering as a PLC is that you, your directors and your financial information will be publicly available online on Companies House, this level of transparency might not suit everyone and should be taken into account when deciding.
What’s the best choice for me?
The decision behind which business structure you choose when registering your business will have many unique factors depending on your situation. I personally feel that for someone wanting to try starting a new business in this post-pandemic world, registering as a sole trader feels like the best decision to begin with, and possibly registering as a PLC in the future when the tax benefits become relevant. However, in all cases like this it comes down to the individual and time and consideration should be taken in this decision.
Hopefully this article has begun to scratch the surface on the differences between registering as a sole trader vs registering as a PLC. The differences discussed here are just the most distinct and important but there are loads of plenty of other small distinctions between. I hope, armed with this knowledge, you can feel more confident in which business structure and classification works best for you.
Nathaniel is a Web Design Executive who also writes content on technology and loves spending his days researching and building new projects, and generally complaining about new trends.