Difference Between Sole Trader and Limited Company

Sole Trader vs Limited Company

Sole trader and limited company are two major forms of business. When starting up, it is very important to decide on the structure of the business as it has many implications for both the owner of the business as well as his dealings with other businesses. Both sole trader and limited company are popular in recent times and entail different functions and responsibilities. This article will highlight the features of both to enable an entrepreneur to decide on the structure that is best suited for his requirements.

Sole trader

This is the simplest structure when starting a business. You just need to register as a sole trader and submit an annual income tax return to continue. The books can be maintained easily and there is no need for an audit. Main features of a sole trader are as follows.

• Owner of the business is responsible for all affairs of the company.

• If there is bankruptcy, owner needs to pay creditors from his assets and cannot run away from them.

• Sole trader has to pay for any legal compensation that might arise because of running the operations of the business.

• The buck starts and stops with the sole trader. He takes all the profit after taxes, and he also bears responsibility for any losses that business may suffer from.

• Sole trader needs to maintain financial records to separate expenses on business and leisure.

• Such a business comes to an abrupt end with the demise of the sole trader or when the business goes bankrupt.

Limited company

Limited company is a separate entity and has a distinct structure with roles and responsibilities. Here are some of the features of a limited company.

There is no sole owner and there are employees who can be directors, staff, or even receptionist to help and assist in the operations of the company.

Registration of a company is required by law and also the minimum number of people to start a company is also specified.

Capital for the business is raised by issuing shares to either employees or to general public. When public is involved, it becomes a public limited company.

Shareholders are not liable for any amount over and above the money they paid for their shares.

Directors, in consultation with shareholders run the day to day operations of the company.

The company continues to exist even if any shareholder or director passes away.

It is clear then that there are many differences between a sole trader and a limited company. However law makes no distinction between the two.