Sole trader vs limited company: what are the differences?.

Most new business owners either start off as sole traders or create a limited company. But what’s the difference — and how do you decide between the two?

Each business structure comes with its own pros and cons, so you should consider your options carefully.

Sole trader — the basics

If you start your own business as an individual and work for yourself, that makes you a sole trader. As a sole trader, there’s no legal distinction between you and your business — in fact, you are the business.

That means all the rewards and responsibilities are yours and yours alone. You’ll need to file a self-assessment return and pay income tax to HMRC every year but beyond that, the profits are yours to spend as you wish.


Easy registration

To sign up as a sole trader, you’ll need to register for income tax self-assessment and file a tax return by 31 January each financial year — that’s it.

Less paperwork

While sole traders still need to keep detailed records of business transactions and pay their taxes on time, they face less red tape and paperwork compared to limited company directors.

Fewer reporting obligations and less complicated tax returns also reduce your administrative burden.


Limited protection

No legal distinction between you and the business means you’re personally liable if anything goes wrong. For example, your assets could be put at risk if your business goes into debt.

Fewer tax planning opportunities

While sole traders can still claim business expenses to reduce their liabilities, there are fewer tax breaks and relief schemes available.

Limited company — the basics

Setting up a limited company can be more complicated than self-employment — but don’t let that put you off.

While you’ll have more rules to follow and reporting requirements to meet, the benefits may outweigh the extra workload.


Limited liability

Since limited companies are legally distinct from their owners, you won’t be held personally responsible if the company incurs losses or gets sued. That means you’re unlikely to pay any debts out of your own pocket.

Tax planning

As a company director, you can pay yourself using a combination of salary and dividends. In many cases, this is more tax-efficient than paying income tax on all your earnings.

Tax breaks such as research & development tax credits and the new full expensing scheme can also help you minimise your corporation tax bill.


Lenders often view limited companies as more trustworthy than sole trader businesses. As a result, incorporating your business may make it easier to secure funding.


More responsibilities

Setting up a limited company means you’ll have more reporting requirements and paperwork to file. After registering with Companies House and paying a small fee, your responsibilities may include:

  • keeping company records and reporting changes
  • filing your statutory accounts
  • submitting and paying your corporation tax return
  • recording minutes of meetings
  • completing your self-assessment tax return

Furthermore, as an employee of your company, you may still need to run payroll to take a salary.

Less privacy

You’ll need to provide sensitive information such as your business address, full name and date of birth when registering your company at Companies House. These details will all be made available to the public.

Less privacy and increased scrutiny of your business affairs may be off-putting for many business owners.

Decisions, decisions

Hopefully, you now have a better idea of which business structure would work best for you — but don’t panic if you’re still unsure.

Remember: your structure is not set in stone. If you prefer, you can start off as a sole trader and incorporate your business further down the line. You may even prefer to opt for another business structure.

Bringing in an expert to help you weigh up your options can make the decision-making process easier.

Want to set your business up for success? Get in touch with us today to discuss your options.

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