Should I Operate as a Company or Sole Trader in England and Wales?

Many small business owners first operate through the sole trader structure and later convert their business into a company. If you are looking to start a business, you may be wondering what the difference is between operating your business as a sole trader and through a company. This article will explain the main distinctions between the two legal structures available to many businesses and explain the advantages and disadvantages of both. 

Overview 

Under a sole trader structure, your business has no separate legal personality from you under a sole trader structure. However, if you trade through a company, your business is its own legal person. 

Therefore, if your business cannot pay a creditor because it does not enough assets, a court can order you to sell your personal assets, like your car or house, to cover the difference. 

Under a company, in most cases, there is a wall between you and your business. Thus, you limit your liability to the number of shares you have in your business. Therefore, barring fraud or breaching your duties as a company director, creditors will only have recourse to your company’s assets if your company cannot meet its obligations. They cannot come after you in your personal capacity. 

Sole Traders

Creation

The law recognises a sole trader business structure automatically under certain circumstances. 

However, you may be operating under a general partnership if you do business with another person, especially where you and the other party act jointly and share the obligations and profits. If this is the case, a different set of laws will govern the administration of your business. 

Key Features 

A business operating as a sole trader will have:

• no separate legal personality. If you have not incorporated a company, it is likely that your business does not have a distinct legal personality; 
• unlimited liability of the business owner; 
• only one owner. Thus, if there is more than one person with an interest in the business who is not an employee, then your business is not operating as a sole trader; 
• ownership and management consolidated in a single person; 
• a lack of any filing requirements or administrative formalities; and
• no constitutional documents. 

Responsibilities 

Compared to trading through a company, sole traders have minimal responsibilities. For this reason, if you have a new business and your potential liabilities are not substantial, it is often easier to operate as a sole trader than as a company. 

In practice, you will treat your business’s profits as income for tax purposes. 

Understanding Unlimited Liability 

As above, if you operate as a sole trader, it is crucial to understand that if your business cannot meet its debts or somebody sues your business, you will bear ultimate responsibility for meeting its debts. 

For some businesses, this may not be so much of a problem. This will largely depend on the size of any customer or supplier transactions and the nature of the business itself. 

On the other hand, suppose you provide a professional service like bookkeeping or operate a trade with a higher risk of personally injuring yourself or another person. In this case, you will need to consider what steps you can take to mitigate the risk of facing unlimited liability for the obligations of your business.

Companies 

Creation

The vast majority of companies created are companies limited by shares. 

A company is brought into existence through incorporation. You can do this by completing the registration process with Companies House, the public body regulating companies. 

Key Features 

A company limited by shares, also referred to as a private limited company, has the following key features:

• separate legal personhood, which means a company can own its own assets and be liable for its own debt; 
• the shareholders’ liability is limited by the amount invested in the company;
• the company will have a constitution that governs its operation, which is largely comprised of the articles of association; and  
• legal obligations on the company’s directors to make specific reports and filings with Companies House. 

Responsibilities

Suppose you incorporate your business into a company. In that case, you will likely be one of the company’s directors as directors are the individuals that act on the company’s behalf. The law imposes many responsibilities onto directors, some of which are significant. You can divide the responsibilities into general duties and filing requirements.

Key Takeaways 

The main distinction between operating a sole trader versus running a business through a company is the extent to which you can be held liable for your business’ debts and other liabilities. There is no legal separation between your business and your personal assets as a sole trader. As such, your assets are at risk if your business cannot pay its debts or meet any claim against it. However, if you trade through a company, you limit your liability to the value of your company shares. The downside is that the law imposes substantial responsibilities on those that run companies. Therefore, limited liability may not be worth the necessary upkeep for small businesses. 

If you need help navigating the legal implications of operating as a sole trader, our experienced corporate lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.

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