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Sole Trader VS Limited Company - What's better?

Updated: Feb 13, 2023





Choosing a legal structure is one of the most important decisions a new business owner needs to make, it can be difficult to understand the differences. This guide will help outline the key differences between being a sole trader and a limited company.


Differences between Sole Traders and Limited Companies


For sole traders, the self-employed business owner and the business is treated together as a single legal entity, while for a limited company, the business is seen as a distinct legal entity that is completely separate from the company director/owner.

This means that a sole trader will be responsible for both personal and business debts so personal assets could be at risk if something goes wrong. In comparison, a limited company’s finances are separate from the shareholders’ or directors’ personal finances so they will only be responsible for the amount of money they put into the business.


Paperwork is another key difference. Being a sole trader comes with very few formalities, while limited companies have much more reporting and management responsibilities such as registering with Companies House, filing accounts and adhering to strict recording keeping requirements.


Is it better to be a Sole Trader or Limited company.


The business structure that is the best option for you will be dependent on your personal circumstances.


There are both advantages and disadvantages to being a sole trader or limited company.


Sole trader is the easiest business structure to set up and it involves a limited amount of paperwork and obligations, this can often be restrictive when you are trying to seek out investment.


Setting up as a limited company is more complicated and involves more costs and paperwork, but it can open you up to many advantages including raising funding, boosting your reputation among customers and being more tax efficient.


Sole Trader Advantages


- You are able to start trading immediately with no requirement to register with companies house.

- Very little is needed and often a Self Assessment is the only requirements.

- You will have the main control over your business.

- The profits that you earn will be retained individually by yourself.

- Your finances are completely private whereas companies are often visible via companies house.


Sole Trader Disadvantages


- You take on all the risks associated with running a business and you hold all the responsibility for its debts. You may need to sell off personal assets such as your house to pay those debts.

- Some organisations choose to not work with sole traders due to the lack of legal protection compared to limited companies.

- Unlike limited companies, your business name is not protected. This means anyone can trade under the same name as you which could cause confusion.

- Raising business finance can be difficult as lenders and investors tend to favour limited companies. This means the growth of your business could be slower than if you were running a limited company.


Limited Company Advantages


- A limited company is legally separate from shareholders and directors so you are not personally liable for any losses made by the business.

- More tax efficient. Running your business as a limited company provides the potential for more profitability. Unlike sole traders who pay 20%-45% income tax, limited companies pay 19% corporation tax so they tend to be more tax efficient. They also qualify for a wider range of allowances and tax deductible expenses. In addition, shareholders can withdraw dividends from the business which don’t attract National Insurance and have a lower income tax rate than a salary.

- Operating as a limited company can encourage more confidence and trust among suppliers and customers. Some businesses prefer to not work with non-limited companies.


Limited Company Disadvantages


- Being a limited company involves more paperwork and administration than operating as a sole trader. The actions you need to take include registering with and paying a fee to Companies House, filing annual accounts to Companies House, filing company accounts and tax returns to HM Revenue & Customs, following PAYE (Pay as You Earn) procedures and filing a Confirmation Statement to Companies House. All these complexities mean it is advisable to employ the services of an accountant.


Change from Sole Trader to Limited Company


Being a sole trader is usually a good idea for people that are starting out, but as you're venture progresses it can often be a good idea to become a limited company to avoid the higher rate tax threshold.


Becoming a sole trader can be a difficult decision, use our free consultation to discuss becoming a Limited company further.


Date Published 07/02/2023


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