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Comparing Sole Traders to Limited Companies

 

Unincorporated vs. Incorporated Businesses

Whilst there are some similarities between sole trader businesses and limited companies, there are also some significant differences. This is in addition to the fact that one of them is incorporated and the other is unincorporated.

The variances include limited liability, prestige, personnel requirements and the costs of starting up.

Limited Liability

Limited liability is the protection from claims against personal assets as a result of actions taken by a company. Most UK incorporated businesses are limited companies and these are seen in law as separate persons. Sole traders and the people who own them are seen as one and the same and therefore claims against the unincorporated business effectively encompass those who own the entity.

Prestige

Limited companies are viewed by some as being more prestigious than a sole trader business. The greater compliance requirements placed up on a company might suggest that it is a more complex and in-depth operation than an enterprise type which is loosely regulated and is the simplest to start.

Items such as the company seal (although no longer a statutory requirement), the number and official certificate of incorporation are elements which are absent in sole trader and partnership businesses.

Personnel Requirements

A sole trader, as the name suggests, requires only one person to start-up, whist a limited company must have at least two officers acting as director and secretary.

The latter requirement could be satisfied with the use of nominees but would represent an additional cost of setting up the business. Partnerships, whether or not they have limited liability (LLP) must have a minimum of two participants.

Cost of Starting up

Financial resources are often limited for new businesses with a large proportion of funds typically coming from the entrepreneur’s personal capital.

Advertising and marketing, stationery, establishing an internet presence and purchasing from supplies are all expenses which a business starting today might incur.

In such a situation, the minimal start-up costs of becoming a sole trader might seem attractive compared with the up-front costs of registering a UK limited company and the on-going expenditure would which is necessary to sustain it.

Although the costs of incorporating a limited company have reduced in recent years, the option is still the more expensive one compared to setting up a sole trader business or another unincorporated business structure.

 
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