That is the question I get asked a lot – so here is a simple answer (and it’s the main reason people will go Ltd rather than stay as a sole trader).
If you are a sole trader the contract is between you personally and your client – if you get it wrong or cause harm, damage or any other type of drastic events – the client can sue you personally and all of your worldly assets become at risk.
If you are a Ltd Company then the contract is between the Ltd Company and your client. The Ltd Company is its own person in law and can act accordingly. If it all goes wrong - a director’s / owner’s personal liability is limited to the amount of share capital that they put into the business – hence the limited liability company. A limited company is a separate legal entity from that of its owners. Thus, it needs its own bank account(s) and the Ltd Company assets / liabilities belong to the company and not the shareholders.
The only time a limit to your liability would be removed is if you are found guilty of wrongful or fraudulent trading.
The tax advantages of being Ltd are slowly being eroded away by HMRC – although there are still some. There are distinct differences in how and when you pay tax – corporation tax v’s PAYE/NI. There are also differences in how directors are best paid/reimbursed for their services.
The Ltd Company must file a set of accounts (profit & loss and balance sheet) with Companies House and HMRC. These take more work than a sole trader’s self-assessment.
A company director also has certain legal responsibilities to your company as laid down in the latest Companies Act.
This is by no means the full comparison of sole trader v’s Ltd – but it’s often the main reason why people go Ltd.
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