Sole Trader Vs Limited Company: The Pros and Cons

October 21, 2022

When you set up your own business, one of the first decisions you will need to make is how to structure your business. The option of sole trader vs limited company is one that many business owners weigh up. So, what’s the difference? And what are the pros and cons of each? Let's explore further below...

Sole traders

Sole traders are self-employed business owners. If you’re a sole trader, there is no legal separation between you and your business - whilst you get to keep the profits, you’re also personally responsible for the liabilities.

Registering yourself as a sole trader is straightforward - you simply need to register with HMRC to complete a Self-Assessment tax return. This means you will pay Income Tax and National Insurance contributions at the end of the tax year.  

Individuals will need to register if they earn more than £1000 from their self-employed business activities in a tax year - so, if that side hustle looks like it may be turning into something quite lucrative, this is a step you’ll need to take. You may also wish to register if you need to prove you’re self-employed for some reason (for example, to claim certain benefits) or if you wish to make voluntary class 2 national insurance payments. 

Let’s take a look at some advantages and disadvantages of being a sole trader:

Pros of being a sole trader

  • Lighter administrative burden. Whilst you’re required to complete an annual Self-Assessment tax return, you won’t need to file accounts. 
  • You can maintain a certain level of privacy. Whilst limited companies are obliged to disclose certain information on public registers at Companies House, sole traders are not. 
  • You can keep all your business’s profits after you’ve paid tax. 

Cons of being a sole trader

  • One of the biggest cons of being a sole trader is that you will be personally liable for any loss your business makes. However, bear in mind that you may be able to take out insurance to mitigate some of the risk. 
  • You will be reliant on your own personal credit rating when applying to borrow money for your business, which may mean there are fewer opportunities available to you. 

Limited Company

A limited company is a standalone legal entity, separate from you. You will be a shareholder (owner) and you may have other shareholders in the business who will own it alongside you. You may also act as a director, with control over the day-to-day running of the business, and you may do this alone or with others.  

Limited companies are relatively straightforward and inexpensive to set up. But if you are looking to set up a limited company, there are some specific things you will need to think about and record in your articles of association (a document that sets out rules for running your company) when setting up, particularly if you will have other directors or shareholders, however, your solicitor will be able to chat you through these. 

Pros of a limited company

  • As the company is a separate legal entity, your personal liability is limited. If the company gets into financial difficulty, the company’s creditors will not be able to go after your personal assets to pay the debts. 
  • Paying yourself a salary and/or dividends from the company’s profits may be more tax efficient as your business grows. If you make a profit, you will be required to pay Corporation Tax, which will minimise your income tax and National Insurance contributions. 
  • You may be able to claim more business expenses than if you are a sole trader. Expenses that you claim back will be deducted from your profits before tax is calculated.
  • You can build a credit rating for your business to help you apply for credit, which may allow you to borrow more than if you were a sole trader.  
  • Credibility – some companies (typically larger ones) prefer to deal with limited companies. 

Cons of a limited company

  • Having a limited company brings with it a higher administrative burden. You’ll be required to submit company accounts at the end of the tax year. 
  • Companies are required to submit certain information to Companies House, which is publicly available – for example, the names of directors. 

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