Business Advice · 4 June 2021

Limited Company Or Sole Trader – Which Is Best For Me?

company trader

One of the first decisions that any budding entrepreneur needs to make when setting up a new business is deciding which legal business structure to use when registering the business with HMRC.

Two of the most common structures to choose from include registering as a limited company or registering as a sole trader – but which is best for you?

There are pros and cons to each route, and as both are fairly easy to set up, the decision new business owners make will come down to their personal circumstances, preferences and vision for the business that they want to grow.

If you are considering setting up a new business or looking for ways to earn some additional cash on the side of your main employment, read on for pros, cons, and key points to consider when deciding whether to structure your business as a sole trader or limited company.

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Article Summary

  • What is a sole trader?
  • What is a limited company?
  • Things to consider when setting up your business
  • Sole trader pros and cons
  • Limited company pros and cons
  • Related questions
  • Summary

Business Structure Choices

Whether you’re a window cleaner, web designer or running an international sales operation, every business must have a legal structure. Most businesses are set up as either a sole trader or a limited company and this decision impacts everything from how much tax you pay, the financial records that you need to keep track of, and your take home income. As a result, it’s important to carefully weigh up both options in line with your business plan so that you can make the right decision for you.

What Is A Sole Trader?

A sole trader is the simplest of business structures to set up and run. There are over 3.4 million sole traders in the UK and this type of business setup means that there is no legal separation between the business owner and the business itself.

As a result, when working as a sole trader, you can keep the profits you make after tax, but are also personally responsible for any losses the business makes. A sole trader business structure is most typically used by self-employed people who are the sole owner and operator of their business.

What Is A Limited Company?

A limited company refers to a business that has its own legal identity that is separate from the business owner or owners. There are nearly 2 million limited companies in the UK and this type of business set up means that any profits and losses made belong to the company, not the individual(s) running it as is the case with self employment.

A limited company can be set up for a business of any size, including those run by just one person. As a director of a limited company you’re responsible for decisions made by your business but the finances and liabilities are separate from your own finances.


Anybody can set up as a sole trader or limited company business by registering the business on the gov.uk website.

So now that you know the basic differences between a sole trader and limited company, how do you decide which is best for you? Read on for all the things you need to consider when making this decision for you and your business.

Things To Consider When Choosing A Business Structure

The size of your business, expected level of turnover, profits, whether you intend to employ other people, and the amount of accounting paperwork that you will be expected to complete, are just some of the factors that you should consider when narrowing down which business structure is right for you.

Take your time to weigh up the options involved for both sole trader and limited company business structures and speak to an accountant if you are unsure about anything. Their specific expertise is invaluable when it comes to tax efficiency and selecting the right business structure for your needs both now, and in the future as your venture grows.

Key Differences:

  • Types of tax due
  • Level of personal liability
  • Accounting requirements
  • Visibility of business activity in the public domain
  • On-going costs to run each business type

Sole Trader Pros And Cons

One of the main differences between sole traders and limited companies is the way that tax is calculated and paid. Sole traders are required to pay tax on any profits that they make. Profits are the difference between the income you’ve received from sales or services delivered, and the expenses that you’ve incurred running the business.

Sole Trader Advantages:

  • Setting up a business as a sole trader is relatively easy and involves very little paperwork and zero fees to pay. Simply register with HMRC.
  • Filing annual accounts as a sole trader is simple and easy to do. Just register with HMRC for your self assessment ID, file your accounts annually online with a self-assessment tax return and ensure you pay your tax bill by the 31st January after the tax year you are reporting on. For full details on the steps to follow and the deadlines to meet visit gov.uk
  • Sole traders are not required to declare their earnings publicly like limited companies which must be shared with companies house. Some may prefer this level of privacy.
  • When running a business as a sole trader, the business owner gets to make all key decisions themselves and run the business operation as they see fit.

Sole Trader Disadvantages

  • As a sole trader is personally responsible for the financial gains and losses associated with their business activity, if the business gets into debt, this debt is the business owner’s personal liability to settle. This isn’t a problem for most sole trader setups as accurate bookkeeping and a sensible business plan goes a long way to preventing things going wrong but, if the business does run into financial difficulty then this is solely the responsibility of the business owner.
  • Depending on your level of earnings, tax rates for sole traders can be slightly less favourable than those afforded to limited companies. Keep an eye on your profits as when you reach a certain level of earnings it may make more sense to register as a limited company for tax efficiency.
  • Be aware that as a sole trader, there are two different types of national insurance to pay, class 2 and class 4 contributions. Find out more about both and the thresholds involved here.
  • Sole traders must rely on their own savings or personal loans to finance their business. Depending on the stability of your business plan, lenders tend to favour loans to limited companies. This is something to consider if you need significant capital to set up and run your business.

Limited Company Pros And Cons

Owners of limited companies are required to pay two types of tax. The first is corporation tax which is calculated on the amount of money the business makes. The second, is tax due on the income you personally make from your drawings from the business. This includes your income tax, national insurance and dividend tax.

Limited Company Advantages

  • Because limited companies have their own legal identity, their owners are not personally liable for the firm’s debts. This means that personal assets and savings aren’t exposed to risk like they are as a sole trader as limited company owners only stand to lose what they put into the company.
  • Limited company ownership is divided up into equal parts called shares. There can be one or multiple shareholders and they stand to share the profit made by the business as a dividend payment at predetermined points in the year.
  • When it comes to taxes for limited companies, corporation tax is paid on business profits. The corporation tax rate is slightly more favourable at 19% compared to 20% for income tax rates at that sole traders are subjected to. This means that depending on the level of business profits made, a limited company could be a more profitable way of running a business compared to a sole trader.
  • At the time of submitting the accounts for a limited company, there is a wider range of allowable expenses and tax deductible costs that are applicable to limited companies which can boost profits made.
  • Nobody else can use the company name of another business when it is registered as a limited company. Sadly, sole traders aren’t offered the same protection.
  • A limited company business structure can project a more professional image to potential clients due to the enhanced requirements that must be fulfilled for it’s set up and on-going management.
  • Directors of limited companies do not pay class 2 or class 4 National Insurance contributions. As company employees, they are only liable for Class 1 National Insurance payments.

Limited Company Disadvantages

  • There are more legal requirements and paperwork required to run a limited company compared to a sole trader business structure. Directors have certain duties and responsibilities that they are legally obligated to fulfil and you can find out more about those here. In addition to the memorandum and articles of association, each director needs to file an annual self assessment to declare their income as well as filing a set of accounts for the business itself.
  • There is more administration required to run a limited company as you are likely to need a company secretary and an accountant too. You must submit an annual company tax return and full statutory accounts to HMRC as well as being responsible for paying income tax and National Insurance contributions for any employees you have too.
  • The added responsibilities associated with being a director can be time-consuming and expensive. Costs to factor in include accountancy costs if you hire the services of an accountant to manage the day to day accounts and annual filing responsibilities for the company, and the incorporation fee due at set up too.
  • Limited companies’ business information can all be found publicly on Companies House which details the names of the directors and the earnings for the business which some people may not like.

Related Questions

Should I Change From Sole Trader To Limited Company?

Many people chose to start their business as a sole trader as it’s the easier structure to set up but there may be a time when business is going well and profits are growing significantly that it may become more tax efficient to change the business structure to a limited company further down the line.

If you are confident that your business is running well and want to take advantage of the increased tax-efficiency, greater borrowing power and other benefits that limited companies enjoy, then it is absolutely possible to change the legal status of your business.

In these circumstances you will need to:

  • Tell HMRC that your legal structure has changed
  • Choose a name for your limited company
  • Register the business with Companies House
  • Decide if you want to be the sole director or if you will team up with others to run the business
  • Set up a separate business bank account
  • Tell your business insurer if you have one that your legal structure has changed.
If you have any questions about the timing of switching to a limited company or the steps involved, it’s best to discuss your circumstances with a qualified accountant.

Summary

When going into business either on your own or with others, you will need to decide what business structure to use. If your choice is between a limited company or a sole trader structure, then this article has outlined the key pros and cons of each to help you make an informed decision. To recap, we have summarised the key differences below the two options below:

  • Types of tax due
  • Level of personal liability
  • Accounting requirements
  • Set up fee and legal administration requirements
  • Visibility of business activity in the public domain
  • On-going costs to run each business type
Ultimately the decision on whether a limited company or sole trader business structure is best for you will come down to your personal circumstances, preferences and vision for the business that you want to build.

We hope the information shared here will help you to make the right decision for you, but if you are in any doubt, or have any questions remaining then we recommend instructing the services of a qualified accountant to talk through your needs.

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