Sole trader vs limited company: Which is better for your business?

When starting a business, one of your biggest decisions is choosing your legal structure. Should you operate as a sole trader or set up a limited company? Each option has its benefits and drawbacks, affecting everything from tax efficiency to legal liability and business credibility. Let’s look at both sides of the sole trader vs limited company discussion.

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Public liability insurance

Whether you’re a sole trader or run a limited company, having public liability insurance can protect you from unexpected claims and ensure your business remains secure. Whether you’re a freelancer, consultant, or small business owner, safeguarding yourself with the right insurance is essential. Get peace of mind and protect your business today.

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What is a sole trader?

A sole trader is the simplest business structure. You run the business as an individual, meaning there is no legal distinction between you and your company. This means:

• You keep all profits after tax.
• You are personally responsible for any debts.
• You pay income tax on your profits.

Many freelancers, consultants, and small business owners choose this structure because it is easy to set up and has minimal paperwork.

What is a limited company?

A limited company is a separate legal entity from its owner(s). This means:

• The company is responsible for its own debts.
• Owners have limited liability, meaning personal assets are protected.
• The business pays corporation tax instead of personal income tax.

A limited company offers more credibility and is often seen as a more professional business structure.

Key differences between a sole trader and a limited company

Feature	Sole Trader	Limited Company
Legal Status	No legal separation between owner and business.	Separate legal entity.
Liability	Owner is personally responsible for debts.	Owners have limited liability.
Taxation	Pays income tax and National Insurance on profits.	Pays corporation tax; owners can take dividends.
Paperwork & Admin	Simple tax return (Self-Assessment).	More reporting requirements (Companies House, Corporation Tax).
Credibility	May be viewed as less professional.	More credibility with investors and clients.
Earnings	Best for lower earnings.	More tax-efficient at higher earnings.

Advantages and disadvantages of being a sole trader

Advantages

• Simple and low-cost setup – Registering as a sole trader is quick and easy via HMRC.
• Full control – You make all decisions and keep 100% of the profits.
• Less paperwork – No need to file accounts with Companies House.
• Easier tax returns – Sole traders only need to submit a Self-Assessment tax return each year.

Disadvantages

• Unlimited liability – If your business goes into debt, your personal assets (home, savings, car) could be at risk.
• Higher tax rate – You pay income tax on all earnings, which can be higher than corporation tax.
• Limited growth opportunities – Harder to attract investors or secure business loans.

Advantages and disadvantages of a limited company

Advantages

• Limited liability – Your personal assets are protected if the business runs into financial trouble.
• Tax efficiency – Corporation tax is lower than personal income tax. Directors can also take dividends, which are taxed at a lower rate than salary.
• Professional image – A limited company is often viewed as more trustworthy and credible.
• Easier to raise funds – You can issue shares to investors and access more business loans.

Disadvantages

• More paperwork – You must register with Companies House, file annual accounts, and submit corporation tax returns.
• Public records – Your company’s financial information is publicly available.
• More complex taxation – Directors must handle corporation tax, dividend tax, and PAYE if taking a salary.

Tax Implications: Sole trader Vs limited company

One of the biggest financial differences between these two structures is taxation.

• Sole traders: Pay income tax (20-45%) and National Insurance on profits.
• Limited companies: Pay corporation tax (currently 25% in the UK). Directors can take a salary (subject to income tax) and dividends (lower tax rate).

For example:

• If your profits are under £30,000, a sole trader setup might be more tax-efficient.
• If your profits exceed £50,000, incorporating a limited company could reduce your tax bill.

How to choose the right business structure

Ask yourself the following:

• How much risk is involved? If your business has financial risks, a limited company offers better protection.
• Do you want to grow? If you plan to expand, a limited company is often the better choice.
• Are you earning a high income? If you earn more than £50,000, a limited company may be more tax-efficient.
• How much admin can you handle? If you prefer simplicity, being a sole trader is easier.

Changing from a sole trader to a limited company

Many businesses start as sole traders and later incorporate as a limited company. Here’s how:

1. Choose a company name – Must be unique and registered with Companies House.
2. Register the business – File paperwork with Companies House and HMRC.
3. Open a business bank account – A limited company must have a separate account.
4. Set up payroll (if needed) – If paying yourself a salary, register for PAYE.
5. Inform HMRC – Let HMRC know you’re switching to a limited company.

The Government website also takes you through the steps for setting up a limited company.

Summary

Both sole trader and limited company structures have their benefits. The right choice depends on your business goals, risk level, and tax considerations.

Choose being a sole trader if you want simplicity and low admin, you’re just starting your business and expect low profits, and you prefer to retain full control over it.

A limited company may be better if you want to protect personal assets from business debts, you’re earning £50,000+ where tax benefits are significant and you plan to scale the business and/or raise investment.

No matter which path you take, it’s always wise to seek professional advice before making your final decision.

Sole trader vs limited company FAQs