Sole Trader vs Limited Company

Many people ask if they should consider going Sole Trader or if they should set up a Limited company when they start out.

sole trader image

The right route for you will depend on your personal circumstances and the business itself. Sometimes this decision is also reviewed later down the line as the business starts to take off.

Sole Trader

  • Business is ran as an individual
  • Business & individual are NOT separate entities
  • Individual is personally responsible for losses and debts
  • Profits are charged using Income Tax and National Insurance rates. Remaining profit after tax is all yours
  • You will need to register as Self Employed with HMRC
  • Requires a Self Assessment to be submitted each year

Limited Company

  • Is run via a registered company that will need to be created on Companies House
  • Limited companies work on a shares basis, meaning ownership is reflective of share split
  • The business and the person are separate entities
  • The business is responsible for all debts and losses, individual liability is limited to the investment they made
  • Profits are charged Corporation Tax
  • Profits are maintained by the company and any extraction is subject to additional tax (Personal tax: Dividend tax or Income Tax)
  • Requires Limited Statutory Accounts to be completed within 9 months of the company year end date, these are to be submitted to Companies House and HMRC (for tax purposes)
  • Also require an Annual Return to be completed

Pros and Cons

Sole Trader

AdvantagesDisadvantages
Relatively easy to set upPersonally liable for business debts, so your personal assets are at risk
Privacy is protected as nothing needs to be publishedLess opportunity to tax plan so likely to pay more tax
Get to keep all profits after taxSome companies prefer to deal with Limited companies rather than Sole Traders
No issues with IR35Can become restrictive as your company grows
Simple tax submissions requiredHarder to raise money
Cheaper accountancy fees

Limited Company

AdvantagesDisadvantages
Limits your personal liability on debts and claims, particularly useful if you have a risky product / service which results in a claimMore complex to set up and maintain, therefore can be more costly
Greater potential for tax planning and ability be more tax efficientLikely to require an accountant
Ability to claim more expenses, E.g. a Landlord is only able to claim a % of mortgage interest via a Self Assessment versus full interest claimed via a Limited CompanySubject to following more regulations
Generally seen as more professional and credible versus Sole TraderSome lenders may ask for personal guarantees
Personal details and company performance available publicly
Withdrawal of monies from company can be complicated

So which option is right for you?

This will still depend on your personal circumstances and your goals with the future of your business. However, I would advise the following:

If your business offers a high risk service or product then its probably best to use the Limited Company route to limit your personal liability

Another factor to consider will be your ambitions for your business, if your aim is to remain as a small business and don’t mind the additional tax in return for simpler financial requirements then Sole Trader option may be best for you

There will also be other considerations to make such as: are you a higher rate tax payer, what are your plans with the money generated from the business

Deciding to go Sole Trader or Limited Company is a big one. I hope this guide was useful in understanding the two options and you’re now better able to make that decision.

If you still have concerns / questions feel free to get in contact. I would be happy to discuss through your personal circumstances to evaluate the best option for you.