Limited Company vs Sole Trader | What’s best for your business structure?

Limited Company vs Sole Trader-What's best for your business structure

Starting a business can be a daunting task that often involves making difficult decisions. Every business requires a legal structure regardless of its size but deciding on whether to set up as a sole trader or limited company makes it even harder.

Picking the wrong structure can have long-term implications and can even ruin potential opportunities for your business. Before deciding on which structure to adopt, it’s important to gather adequate information on the pros and cons of a limited company and a sole trader.

So what is the difference between a sole trader and a limited company, and which one is best for you?

Choosing between a sole trader vs limited company

You might be stuck on starting either a sole trader or a limited company. Before choosing the business structure to start, you should look at the difference between a sole trader and a limited company and understand the legal structure used for each type of business.

A limited company has more benefits than just keeping track of your earnings. It gives you access to certain legal rights, such as protection against loss of your personal assets if the company fails to pay its debts. In addition, it is easier to run because you only have to deal with one set of rules rather than two different sets of rules.

A professional limited company accountant such as Ascott Blake will help you prepare the paperwork needed to form a limited company for small businesses. This includes preparing the Articles of Association and Memorandum & Articles. If you offer ‘disguised employment’ (employing workers through a third party), you will be considered to be inside IR35.

However, if you want to sidestep the issues of disguised employment, you should set up as a sole trader. Although you don’t have to register with Companies House, you will still be required to pay tax. Our sole trader accountants will be able to assist you with your annual self assessment tax returns, bookkeeping and accounts support.

If you are unsure where to begin, then an accountant can help you choose the best option for you.

What is a limited company?

A limited company is a structure that has its own legal identity. This means that the company’s assets and liabilities are separate from the personal assets of the business owner.

Since it has limited liability, individual directors and shareholders cannot be held personally responsible for the company’s losses and debts. This means that their liability is limited to their investment in the company, and the company’s finances and liabilities are completely separate from the shareholder’s personal assets.

How is a limited company set up?

The ownership of a limited company is divided into different portions based on the amount a shareholder has invested. This can either be a sole shareholder or multiple shareholders.

You should follow several steps when setting up a limited company, such as choosing a business name, deciding on the business premises, and filling in all the company registration paperwork.

Here are the necessary steps we recommend that you follow:

  1. Choose a simple and unique business name
  2. Choose company officers – Unlike sole traders, limited companies require at least one person responsible for managing all the business throughout the year. A company director helps manage the company according to the law and the internal set policies and prepare annual accounts for the business per the Companies Act of 2006. Apart from a limited company director, the company will also need shareholders, guarantors, and secretarial staff.
  3. Document all the details on how the company will run and outline the employment status of key staff. 
  4. Register the company – There is a lot of paperwork involved when registering a limited company. After choosing the company name and officers, you can do all the paperwork and register your company with Company House. Ensure that your business complies with the Companies Act of 2006.You will need to submit a Memorandum of Association documents detailing the business assets, trading activities, names of all company owners, and their percentage of ownership. After getting your company registered, the business can confidently start its operations.

What taxes does a limited company pay?

Limited companies pay corporation tax on business profits and are exempted from paying national insurance and income tax.

It is more tax-efficient than a sole trader since it is free from national insurance, and a corporation tax rate is relatively lower. Since it has a separate legal entity, any trading losses can be offset against profits made the previous year or in the future.

How are limited company taxes calculated?

A limited company enjoys a lower tax threshold than a sole trader structure. You only pay tax on your profits at a low rate of just 19%. The limited company owners mix their salaried pay with dividends to cut their national insurance contributions and personal tax.

What is a sole trader?

A sole trader is a self-employed person who starts and runs their own business as an individual. Since they are not an incorporated business, a sole trader is easy to start and run, and little reporting is required.

Although you can hire workers, a sole trader is run and owned by just one person. As the owner, you are personally responsible for all business operations conducted. The employment law does not cover sole traders since they are their bosses in most cases.

Also, the business owner and the investment in a sole trader are treated as a single entity. This means that as the owner, you are personally liable for any debts and business losses. There is no legal difference between the business and the owner.

You can keep after tax profits as a sole trader with unlimited liability. Mainly, people who offer a specialist service, such as plumbers, hairdressers, and electricians, should operate as sole traders. Unlike limited companies, sole traders can deposit and withdraw cash from their business bank without tax implications.

How do I register as a sole trader?

Starting as a sole trader is an easy process. You can decide to work full-time on your business or part-time while still working for an employer.

Here is our step-by-step guide on how you can start a sole trader business:

  1. Understand what self-employment means. At Ascott Blake we can offer professional advice in order for you to understand the requirements of bing a sole trader, your tax requirements and whether it’s best for your business to work as a sole trader or a limited company.
  2. Choose a unique name that you will be trading under. To prevent other people from using your business name, we can help you register for a trademark.
  3. Register for tax. You will be required to register for Self Assessment at Company House for tax purposes. At Ascott Blake we can help you with this.
  4. Register for Self Assessment and VAT. You need to be completely transparent and share all your business transactions with HMRC.

What taxes do sole traders pay?

A sole trader tends to pay more taxes compared to a limited company. Apart from paying income tax based on taxable profit, a sole trader should pay national insurance contributions.

Reasonable expenses such as travel expenses, marketing, materials and stock, internet and phone for business use, utility bills, and rent for business premises are offset from your self-employed income when calculating the taxes.

For tax purposes, your taxable profits must be well prepared in accordance with UK GAAP (body of accounting standards).

If the sole trader decides to sell their tangible and intangible assets, they will be required to pay capital gains tax and profits. Trading losses can also minimise personal taxes.

You will need to seek expert accounting services from professionals such as Ascott Blake to assist you in preparing your annual self assessment tax return.

How are sole trader taxes calculated?

The tax rate varies depending on your annual profits for a sole trader. For instance, sole traders whose monthly earnings are below £12,500 benefit from a personal allowance. If the earnings are between £12,501 – £50,000, then they are taxed at a rate of 20%.

Amounts between £50,001 – £150,000 have a higher tax rate of 40%. If the amount exceeds £150,000, a 45% tax rate band is used.

The advantages and disadvantages of sole trader vs limited company

Let’s compare the two types of business structure in more detail!

Sole trader advantages

  • It’s easy to set up and run
  • The public has no access to the business’ accounts
  • The sole owner does not have to register as an employer
  • A sole trader does not need to register their accounts with Company House
  • It is easy to close. Sole traders, however, will be required to pay capital gains tax if they decide to sell their business

Sole trader disadvantages

  • There is limited scope to benefit from tax relief
  • Profits are taxed at an individual rate higher than the corporate tax rate
  • There is unlimited liability for the business debts
  • They have less access to bank credit since a personal guarantee is not enough
  • There is no limit on personal liability for the debts of the business
  • If the sole owner dies, the business may cease trading

Limited company advantages

  • The business has a limited liability which means that the liability of the shareholders is limited to their shares. This means they will not be personally liable for the company’s debts, and their personal finances cannot be seized
  • The company is a separate legal entity from the owners and directors
  • Limited companies only pay corporation tax, which is taxed at a rate of 19%
  • It has more flexibility than a sole trader because it can have multiple directors

Limited company disadvantages

  • Compliance rules and bureaucracy are stricter in a limited company than in a partnership or when you are a sole trader
  • The public can see the company’s summary accounts and filings
  • It is more expensive to open, run, and close compared to a sole trader
  • There is more paperwork to complete since they must file their accounts with Companies House every year


Is limited company better than self employed?

Limited companies are better if you plan to start a big company since they offer more protection against personal liability. Plus, they provide additional benefits such as tax relief, employee benefits, and access to finance. It is not the personal responsibility of the shareholders to meet the debts when the company is unable to. The decision between a sole trader and a limited company also depends on other factors, such as your future goals and your current financial position.

You should weigh the pros and cons of the two legal structures and see which works best for you.

Which is more tax efficient, sole trader or limited company?

Looking at a sole trader vs limited company from a personal tax point of view, a limited company is more tax-efficient since they only pay corporation tax. They are exempted from national insurance, which means they can take a small salary and the rest of their income as dividends.

Can one person be a limited company?

Yes. In most cases, a single individual can incorporate a limited company. However, you must apply for HM Revenue & Customs (HMRC) permission. Setting up as an individual is possible for small businesses that want to run independently without having other shareholders.

When should I set up a Ltd company?

If you want to grow your business and raise capital, setting up a limited company might be a good idea. Besides, you can start this type of business if you will require more bank credit or plan to sell the business in the future. You should, however, think carefully about what you want to do before registering the company.

How Ascott Blake can advise you

At Ascott Blake based in Bishops Stortford, we understand the hassle of starting a business, whether a sole trader or a limited company. We provide you with corporate advisory services to ensure that you set up your business with ease and ensure that your business makes a profit.

Our team of experts offers tailored solutions to help you achieve your objectives and we can offer advice to help you understand these two different legal structures. Plus we’ll recommend the business type based on what matters most to you, leaving you safe in the knowledge that you’re on the right path.

If you want to seek advice from a specialist accountant such as Ascott Blake in Hertfordshire then call our advice line on 01279 797 222 today.


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