Real estate is one of the most lucrative and rewarding industries, attracting many to establish their very own businesses. However, it does require a lot of decision making.
One of the many decisions you have to make when starting your very own property development business is whether to choose to start as a sole trader or a limited company. But what are the differences between the two? And which one should you choose?
What Is a Sole Trader?
Being a sole trader, also known as ‘sole proprietorship’, means that you will have complete control over your business. It is the simplest business structure, making it the preferred choice by many. The law will see you and the business as the same legal entity. You are self-employed and have full ownership of the company, including all the finances.
In the real estate industry, special services, such as electrical works, plumbing, decking flooring and other technical home improvement businesses are often registered as sole traders if they are small scale businesses.
However, it is common to see companies that do porcelain paving supply or composite decking supply like Uk Flooring Direct, ultradecking.co.uk, Marshalls.co.uk, Royalstones.co.uk, Timbertech UK etc. to trade as Limited companies.
What Is a Limited Company?
Unlike a sole proprietorship, you, as the owner or director, and the company are different legal entities. The ownership of a limited company can be shared between stockholders. For this reason, it is a more complicated business structure than sole proprietorships. Company finances are also separate from the personal finances of the director or shareholders.
Advantages and Disadvantages
Registering your property development business either as a sole proprietorship or limited company has its advantages and disadvantages. You will need to weigh them carefully. Here are some of them.
Pros and Cons Being a Sole Trader
A sole proprietorship is a simpler business structure, making it easier to set up. It can be a better choice for the smallest businesses or self-employed individuals. You will have the most freedom when it comes to operating the business.
As for the finances, you can keep all of the profits and use them as you please. Sole proprietorships also have more privacy compared to limited companies. You don’t have to make any business information, such as accounts and records, accessible to the public.
However, there are quite a few drawbacks of being a sole trader. Because the law recognises you and your business as the same legal entity, you will be personally liable when the company fails or goes into debt. If it happens, you could potentially lose even your very own personal assets. In case of a legal dispute, you will be held accountable for everything.
Pros and Cons of a Being a Limited Company
A limited company in the UK can be a more complex business structure, but overall, it has more advantages. Because it’s an independent legal entity, you have the benefit of having limited liability. It also means that your very own personal assets are separate from the company’s finances.
When it comes to perception, limited companies are often deemed more professional and trustworthy than a sole proprietorship, largely due to the limited liability. For this reason, other businesses are more likely to work with limited companies than sole traders.
While registering your business as a limited company has its merits, it does have its drawbacks as well. Being of the complexity of this business model, you will have to handle more responsibilities, which can both be time-consuming and costly. You will also have a lesser degree of freedom, always considering the company when making decisions.
And lastly, you will need to make all details of your business publicly available via Companies House UK, such as the directors, shareholder\s, and earnings.
Property Development Taxes
Perhaps the most relevant difference between sole proprietorships and limited companies in the property development industry is the taxes. Sole traders are required to pay income taxes, which can be advantageous for lower-income individuals.
As a sole trader or partnership, the tax for selling a property can be as high as 45% in case of a property development trade. Likewise, property investors need to pay capital gains tax, which is at 28%.
On the other hand, as a limited company, property developers are required to pay only corporation taxes for both chargeable gains and business profits, which is at 20%. For this reason, limited companies are often more tax-efficient than sole proprietorships, especially for bigger businesses. However, these are only general scenarios, and other factors can affect accounting and taxes.
Before you choose between a limited company or becoming a sole trader you will have to weigh all the factors. Overall, a sole proprietorship is easier to set up and operate, and perfect for smaller businesses. On the other hand, bigger businesses will most likely benefit more when registered as a limited company.