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Sole Trader vs Limited Company

Posted on Wednesday, 20th March 2024

Sole Trader vs Limited Company

Catherine Storer, a business owner at Essential Site Skills who has experienced the journey of transitioning from a sole trader to owning a limited company more than a decade ago, has encountered the question of which business structure is superior countless times. Colleagues, associates, family, and friends have all expressed their curiosity about this topic, underscoring its significance and widespread relevance.

In this blog, Storer aims to demystify the advantages and disadvantages of both business structures, offering insights that can help you make an informed decision based on your unique circumstances and aspirations. It's a common misconception that limited companies inherently hold the upper hand; however, the reality is that the optimal choice depends entirely on your personal situation, the nature of your business, and your long-term goals.

“Should I go self-employed or limited company?”

Storer shares that, in her journey, she found starting as a sole trader was a smart initial move, especially when not pushed towards incorporation by partners or stakeholders. “It allowed me to leverage my expertise in a familiar field, crucial for early success and risk management,” she reflects. However, transitioning to a limited company became a strategic decision as her business evolved, considering the balance between personal liability and the need for regulatory compliance. “This choice,” she emphasises “hinges on personal business goals and risk appetite, making tailored advice from a financial advisor invaluable.”

Sole Trader: The Personal Touch

Starting as a sole trader is often the simplest and most straightforward way to set up a business. It requires minimal paperwork and allows you to maintain full control over your operations. As a sole trader, the business is essentially an extension of yourself, meaning you're personally responsible for any debts and liabilities your business incurs.


Ease of Setup and Management: Setting up as a sole trader is relatively uncomplicated, with fewer regulatory requirements compared to a limited company. This simplicity extends to ongoing management and administration.

Direct Control: As the sole decision-maker, you have the autonomy to steer your business in any direction without the need for consensus or approval from others.

Tax Simplicity: Tax affairs tend to be more straightforward, as you're taxed as an individual on your business's profits.


Unlimited Liability: The most significant drawback is the lack of distinction between personal and business assets, which can pose a risk to your personal finances if the business faces financial difficulties.

Perception and Growth Potential: This is often influenced by the industry and the nature of the work. In some sectors, sole traders may be seen as less established compared to limited companies, which could affect opportunities. However, this impact largely depends on your specific business area and the preferences of your clients and suppliers.


Limited Company: A Formal Structure

Transitioning to a limited company involves a more formal structure, with the company becoming a separate legal entity from its owners. This separation provides a level of protection for personal assets and can influence how your business is perceived externally.


Limited Liability: The most notable benefit is the protection of personal assets. As a shareholder, your financial risk is limited to the value of your shares in the company.

Tax Efficiency: Limited companies can be more tax-efficient, with opportunities to optimise salary and dividend payments to minimise personal tax liabilities. Keep in mind, though, that the tax benefits of operating as a limited company have been decreasing due to changes in government policies and tax thresholds. It's wise to consult a financial advisor to understand the implications of this change for your specific situation.

Professional Image: Incorporating can enhance your business's credibility and professional image, potentially opening doors to new opportunities and markets.


Regulatory Requirements: Operating as a limited company comes with increased regulatory obligations, including annual filings, corporate tax returns, and adherence to company law.

Complexity and Costs: The setup and ongoing administration of a limited company are more complex and costly than operating as a sole trader.


Making the right choice

Deciding whether to operate as a sole trader vs limited company is a pivotal decision that hinges on numerous factors, including your business's scale, financial goals, risk tolerance, and the level of administrative complexity you're prepared to manage.

For those starting small or testing a business idea, beginning as a sole trader offers simplicity and direct control. However, if your vision includes rapid growth, seeking investment, or protecting personal assets, the structure of a limited company might be more aligned with your objectives.

Ultimately, there's no one-size-fits-all answer. It's about weighing the pros and cons in the context of your specific situation. Consulting with a financial advisor or accountant can provide personalised insights and guidance, helping you navigate this decision with clarity and confidence.

In conclusion, both paths offer distinct advantages and challenges. By carefully considering your business model, growth ambitions, and personal circumstances, you can choose the structure that best supports your journey toward success. Remember, what works for one entrepreneur may not be the best fit for another, so it's essential to tailor your decision to your own career goals and personal circumstances.

How do I set up as a sole trader?

To set up as a sole trader in the UK, you need to register with HMRC, ideally online. This process involves providing personal details and information about your business. As a sole trader, you're responsible for keeping accurate business records, filing Self Assessment tax returns, and paying Income Tax and National Insurance Contributions on your profits. It's a straightforward way to start a business, offering full control but also personal liability for any business debts.

It’s really simple, with just a few steps and you’re all set up:

  • Choose a name for your business or simply use your own name. You do not need to register your name. Although you must not use words like ‘limited’ for example, visit the link below for more guidance.
  • Register for Self Assessment with HMRC.
  • Keep records of your business's sales and expenses.
  • File a Self Assessment tax return annually. If you're not confident in handling this yourself, consider hiring an accountant specialising in sole traders. Their expertise can streamline the process and ensure compliance. Compared to running a limited company, the costs for this service are typically lower.
  • Pay Income Tax and National Insurance Contributions on your profits.
  • You must register for VAT if your turnover is over £85,000.

For full details, visit GOV.UK.


How do I set up a limited company?

Setting up a limited company, you need to choose a unique company name, appoint directors and shareholders, and register with Companies House. The registration can be done online for £12, usually within 24 hours, offering a quick and cost-effective way to establish a limited company. Please note changes to Companies House fees for incorporation and registration are increasing as of the 1st May 2024.

Visit GOV.UK for Step by Step Instructions

VAT Registration

Regardless of your business structure, if your turnover exceeds £85,000, you must register for VAT. You can also choose to register voluntarily if it benefits your business, or companies you are intending to work with require you to be VAT registered.

To register for VAT, businesses must complete the process online through the UK Government's website. This involves providing detailed information about your business, including its legal structure, turnover, and banking details. Once registered, you'll receive a VAT registration number. It's important to regularly submit VAT returns and keep accurate records once registered. For specific cases, like joining a VAT group or registering a non-UK business, additional guidelines apply. For more details, visit GOV.UK.

Limited company bank account

Setting up a limited company bank account involves gathering necessary documents like the certificate of incorporation and proof of identity for directors and shareholders. Approach different banks to compare business account offerings, considering factors such as fees, transaction charges, and additional services needed, like overdraft facilities or international payments. Costs may include account opening fees, monthly maintenance fees, transaction charges, and fees for extra services. Review the fee structures carefully to understand ongoing expenses, such as annual fees and charges for exceeding transaction limits. Despite the costs, investing in a suitable account streamlines financial management and enhances the company's credibility.

Some banks may offer free fees for a certain period when signing up for a business account, so it's worth exploring these options.

Choosing Your Business Name and Logo

Your company name must be unique and not infringe on existing trademarks. When choosing a logo, consider its relevance to your business, simplicity, and versatility. A good logo should represent your business effectively and adapt to various uses, from your website to business cards.

When choosing a business name, consider its relevance to your industry, appeal to your target audience, and its memorability. Ensure it's unique and not already in use or trademarked. Checking domain availability for a corresponding website is also crucial. Aim for a name that allows for future business growth and expansion.

Choosing the right logo for your business involves several important considerations. It should be memorable, timeless, versatile, and appropriate for your brand. The logo needs to resonate with your target audience, reflect your brand's identity, and stand out from competitors. Additionally, it should be scalable, working well across various mediums and sizes without losing clarity. Opting for a simple design can enhance its adaptability and recognition.

When selecting colors, consider the psychological impact and relevance to your brand. If design isn't your forte, consider hiring a professional, such as a branding agency or a freelance designer. Costs can vary widely, from affordable crowdsourcing options to more expensive custom designs by experienced professionals. Remember to check for trademark availability to protect your logo from being copied.

How can AI help me choose the right business name and logo?

AI can significantly aid in generating business names and designing logos by analysing current trends, industry keywords, and brand essence to suggest creative and relevant options. It can offer a wide range of name variations and logo designs quickly, allowing businesses to choose from diverse and innovative options that align with their brand identity and values. Additionally, AI tools can check for domain and trademark availability, ensuring the uniqueness and legal security of the chosen name and logo design.

Staying Updated

For UK-based sole traders and limited companies, staying abreast of the latest tax implications is essential for compliance and financial efficiency. Here's how you can keep informed:

HM Revenue & Customs (HMRC) Website: As the UK's tax, payments, and customs authority, HMRC's website is the primary source for tax rates, allowances, deductions, and changes in tax legislation. They offer detailed guides, tools for calculations, and the latest news on tax matters.

Professional Accountancy Bodies: The Institute of Chartered Accountants in England and Wales (ICAEW), the Association of Chartered Certified Accountants (ACCA), and the Chartered Institute of Taxation (CIOT) provide resources, updates, and professional insights on taxation that are specific to the UK.

Tax Software Providers: UK-specific tax software like Sage and Xero offer not just tools for managing taxes but also provide updates and guides on UK tax laws and best practices through their blogs and newsletters.

Business News Outlets and Financial Publications: UK-focused financial news platforms such as the Financial Times, The Economist, and BBC Business offer articles, analyses, and expert opinions on tax changes and their implications for UK businesses.

Webinars and Online Courses: Many UK accountancy firms and educational platforms offer webinars and online courses focused on UK tax planning and compliance, providing a way to gain insights directly from tax professionals.

Local Business Support: Organisations such as the Federation of Small Businesses (FSB) and local Chambers of Commerce in the UK often hold events, workshops, and seminars where updates on taxation are discussed. They can also be a valuable network for finding reputable tax advisors and accountants.

By leveraging these resources, sole traders and limited company directors in the UK can ensure they remain informed about their tax obligations and any new opportunities for tax efficiency.

Frequently asked questions in regards to operating as a sole trader vs a limited company

What is a sole trader?

A sole trader is an individual who owns and operates their own business. This structure allows for full control and decision-making power, but also means the individual is personally responsible for all financial aspects of the business, including debts and liabilities. It's a straightforward and flexible way to run a business, with fewer formalities compared to a limited company.

What is a limited company?

A limited company is a business structure where the company is a separate legal entity from its owners. This means the company's finances are distinct from the personal finances of its owners, and the owners have limited liability for the company's debts. Limited companies can be either "limited by shares" (typically profit-making businesses) or "limited by guarantee" (often not-for-profit). This structure can offer tax advantages and enhance the business's credibility.

Do you pay less tax as a sole trader or limited company?

The decision between operating as a sole trader or a limited company has become more nuanced in light of recent changes in tax legislation and economic conditions. Historically, limited companies offered significant tax efficiencies due to lower corporation tax rates compared to the income tax rates applicable to sole traders. Limited companies pay corporation tax on their profits, which as of April 2023 is set at 25% for profits exceeding £250,000, with a lower rate for smaller profits. This separation of business and personal finances provides some tax planning flexibility for directors in terms of salary and dividend distribution.

However, the tax advantages for limited companies have been diminishing. The gap between the tax efficiencies of the two structures has narrowed, particularly for business owners who pay themselves through a mixture of salary and dividends from their limited companies. The evolving tax landscape, including changes to dividend taxation and corporation tax rates, has reduced these advantages. Sole traders, on the other hand, pay income tax and National Insurance on their profits, which can be less tax-efficient at higher levels of profit. Despite this, the simplicity and reduced bureaucracy of sole trading remain appealing for many, especially for businesses that are unlikely to exceed higher tax thresholds.

It's crucial for business owners to consider current tax regulations and their personal and business circumstances when choosing their business structure. Consulting with a financial advisor or accountant can provide tailored advice, ensuring the chosen structure aligns with both current needs and future growth aspirations.

How do I know if I am a sole trader or limited company?

Determining whether you are operating as a sole trader or a limited company involves understanding the key differences between these two business structures.

As a sole trader, you are self-employed and run your business as an individual. This means you have complete control over the business direction and retain all profits after taxes. Setting up as a sole trader is relatively straightforward, requiring you to notify HMRC and pay tax through Self Assessment. One significant drawback is unlimited liability, meaning your personal assets could be at risk if the business incurs debts.

On the other hand, a limited company is a separate legal entity from its owners, meaning the company's finances are distinct from your personal finances. Shareholders own the company, and directors run it. Limited companies offer limited liability protection, meaning your personal assets are generally safe if the company faces financial difficulties. They can also be more tax-efficient for those with sizeable profits, as they pay Corporation Tax on profits at a flat rate, which can be lower than the Income Tax rates that sole traders pay. However, limited companies involve more complex setup and administration processes, including registration with Companies House and more stringent reporting requirements.

If you're still unsure about your business structure, consider your preference for privacy, the level of financial risk you're willing to take, your expected profits, and how much administrative work you're prepared to handle. Businesses often start as sole traders and switch to a limited company structure as they grow and their needs change.

For more detailed guidance, it's advisable to consult with a financial advisor or accountant to understand which structure best suits your business needs and personal circumstances.

How much tax do sole traders pay?

Sole traders in the UK pay Income Tax on their profits, with a personal allowance of £12,570 for the 2023/24 tax year. Tax rates are 20% for profits between £12,571 and £50,270, 40% for profits between £50,271 and £125,140, and 45% for profits above £125,140. They also pay Class 2 National Insurance at £3.45 a week and Class 4 National Insurance at 9% on profits between £12,570 and £50,270, and 2% on profits over £50,270. VAT registration is required if turnover exceeds £85,000.

Is it more tax efficient to be a limited company?

Operating as a limited company can be more tax efficient compared to being a sole trader, primarily due to the lower Corporation Tax rate on profits and the flexibility in how profits are withdrawn from the company. However, tax advantages have been diminishing due to changes in tax legislation. It's important to consider current tax regulations and seek professional advice tailored to your specific circumstances.

How much should I earn to go limited?

The decision to transition from a sole trader to a limited company doesn't have a fixed income threshold; it varies based on individual circumstances, including tax efficiency, liability concerns, and business goals. Generally, it becomes worth considering when your profits reach a level where the tax savings and benefits of a limited company structure outweigh the additional complexities and costs involved. Consulting with a financial advisor can provide personalised advice based on your specific financial situation and business needs.

What is the minimum turnover for a limited company?

There isn't a legally defined minimum turnover requirement for a limited company in the UK. Businesses can choose this structure regardless of their size or revenue. The decision to form a limited company is often based on factors like liability protection, tax planning, and business credibility, rather than just turnover.

Do I need an accountant to set up a limited company?

While it's not a legal requirement to have an accountant to set up a limited company, many find it beneficial. Accountants can provide valuable guidance on the setup process, tax obligations, and financial planning, ensuring compliance and potentially saving you time and money in the long run. If you're confident in handling these aspects yourself, you may choose to set up the company without one, but for many, the expertise of an accountant is invaluable in navigating the complexities of company formation.

Can you set up a limited company with one person?

Yes, you can set up a limited company with just one person. In the UK, a single individual can act as both the director and the shareholder of the company, making it possible to establish and run a limited company on your own. This structure allows for the separation of personal and business finances, providing limited liability protection for the individual involved.

Why limited company over sole trader?

Choosing a limited company over a sole trader structure often involves considerations such as liability protection, as limited companies provide a legal distinction between personal and business finances, reducing personal financial risk. Tax efficiency is another factor; limited companies might benefit from lower corporation tax rates and flexible profit distribution. Additionally, a limited company can offer enhanced professional credibility to clients and suppliers, potentially facilitating business growth and investment opportunities.

Can I change from Ltd to sole trader?

Yes, you can transition from operating as a limited company to being a sole trader. This process involves closing your limited company and then continuing your business activities as a sole trader. It's important to consider the legal, tax, and financial implications of this change. Consulting with a financial advisor or accountant is advisable to navigate the process effectively.