The Difference Between Limited Liability Companies and Sole Proprietors
There are several distinctions between sole proprietorships and limited companies, ranging from taxation to financial stability. But have you ever considered switching from your existing legal structure to another?
This essay will highlight some of the distinctions between them so you can decide what is best for your company in the long run.
What exactly is a sole proprietor?
A lone trader business is owned and run by a single self-employed person. In the eyes of the law, the company is the same as its leader.
This is a significant disadvantage of this structure because the individual is personally liable for all corporate debts and losses.
As a result, if you are unable to pay any obligations generated by the firm, you may lose your home and all of your money. Personal bankruptcy may ensue if you are unable to pay them at all.
What exactly is a limited company?
One or more shareholders own a limited company, which is administered by one or more directors. A person can be both a shareholder and a director of the same firm, which means they own and govern the company.
Limited firms have their own legal identities and are responsible for their own debts, losses, and legal claims. This signifies that the company's owners enjoy some amount of financial security.
Many small business owners choose to form a limited company because of the limited liability. However, this is not the only advantage that business owners can enjoy.
Corporate ownership
The corporation might be held by more than one person, which can help with decision-making and seamless operation. This differs from a single proprietorship, in which only one business owner is responsible for all the company performs.
If the director of a limited company died, the corporation would continue exist in its own right. This is referred to as "perpetual succession." However, if a sole proprietor dies, their business ceases to exist.
When you have a limited company, you may find that you have a bigger number of clients with whom you can engage. This is due to the fact that some businesses prefer the security of limited liability and may refuse to engage with single proprietors.
Taxation and income
Directors are paid through PAYE, which means they are subject to Income Tax and Class 1 National Insurance on any amount in excess of their Personal Allowance.
In addition, they can receive dividends that are taxed at a rate ranging from 7.5% to 38.1% (for more information on dividend tax, please see our previous blog post: What Is Dividend Tax?).
Both are less than the Income Tax (20-45%) and National Insurance Classes 2 and 4 that sole merchants must pay on their earnings through Self Assessment.
A limited corporation has its own credit profile and the ability to borrow money in its own name. As a result, the corporation is liable for any debt incurred against it. This is in contrast to sole proprietors, who must borrow against their own credit history and take out personal loans to fund their business.
Expenses and advantages
Company directors may be qualified to collect Statutory Sick Pay (SSP), while sole proprietors are not.
Access to more advantageous pension scheme choices may be obtained through the company. However, sole proprietors can only participate in a personal pension scheme.
If this piece has convinced you to form a limited company, keep a watch out for our next blog post, which will lead you through the process of converting from a sole trader to a limited company.