This is a first and key decision that a person makes before registering a company. This is an essential issue as you make a choice on how your entity will be structured, managed, controlled and even taxed. These two forms are both popular but entail different functions and responsibilities.
As a sole trader, you become personally liable for your business results and its debts. This is the main difference from limited companies in which its shareholders’ liability is limited to the amount of its own shares. Thus, it gives you a guarantee that you will not be held liable with your personal assets. If you become bankrupt as a sole trader, you will need to pay creditors from your own assets.
People usually chooses to become sole traders, if they wish to start a business quickly and easily. A sole trader is a simple structure as this is a form of the sole entity. The accounting and bookkeeping is the simplest and you are not required to be audited. To get started you need to bypass a simple registration procedure. Sole traders are formed by persons who provide services and perform works personally or with a help of a few employees. These can be accountants, lawyers, advocates, auditors, consultants, etc. Such professions require total control and personal responsibility of its business.
It is attractive that all profits after tax is distributed to the sole trader.
It is also rather easy and cheap to close your business in comparison to limited companies. In the meantime, limited companies have many benefits that make this form more popular among businessmen. In some cases, limited companies are more prestigious if you will deal with partners and creditors.
Limited company is a separate entity and its owners are responsible for company’s debts within the limits of its shares. A sole owner or several owners of a limited company can hire director that will manage the company’s day-to-day business affairs and who will become responsible for finances, accountants and decisions made within its authorities.
Limited companies continue to exist even if the shareholder or director passes away.
Depending on jurisdiction, limited companies have specific rules for accounting, reporting, auditing, archiving and other matters. Besides, in some cases liquidation procedure can be complex if the company has many assets, debts, employees, etc.