Sole Trader or Limited Company? Working out what’s best for you.

Sole Trader or Limited Company? Working out what’s best for you.

We take a look at the pros and cons of being a sole trader or a limited company so you can work out what's best for you and your business.

Jamie Trowell
Jamie Trowell
Accounting Lead at Coconut
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It’s often the first question people have when they’re starting their self-employment journey. Should I become a limited company or a sole trader?

There are key differences between the two, especially when it comes to tax. In this article we’ll go through some of the things you need to consider as you’re making the decision.

It’s also a good idea to seek specialist advice from an accountant if you’re not sure what’s going to work best for you.

So, what’s the difference?

In essence, being a sole trader means you are trading as an individual, while being a limited company means you are trading as a company, albeit a company of one.

Being a sole trader is the simplest way to operate as a freelancer and involves the lowest accountancy costs and the highest degree of privacy.You’ll need to keep track of your income and expenditure related to the work you do.

Technically speaking, being a sole trader means you’re personally responsible for any losses your business makes. But you’ll also be able to keep all of the company profits you make after you’ve paid tax through the completion of your self-assessment tax return.

A limited company is a separate legal entity, with separate finances from your own personal finances. That means your personal possessions are not at risk if any debts are incurred by the company. As a director, you will have the responsibility of all financial and legal obligations of the company.

As a limited company there are more reporting requirements, for example you’ll be required to file your accounts at Companies House each year. Perhaps most importantly, because your company is a separate legal entity, you can’t just move the money your client pays you straight into your own personal bank account.

Instead, you have to take money “out of the business” through a mixture of salary and dividends. You’ll need to do some tax planning to figure out the optimal levels for each, something an accountant is best placed to advise on.

Now we’ve covered the core differences between the two, let’s take a look at the pros and cons of each.

Sole Trader, the pros:

  • Be your own boss. Being a self-employed sole trader means you’re well and truly your own boss so you can run your business exactly as you wish.
  • Keep all the profits. You get to keep all the profits after tax.
  • Easy to set up. The process of setting up as a sole trader is very straightforward. All you have to do is inform HMRC and register as self-employed if you anticipate earning more than £1,000 within the tax year.
  • Low start-up costs. Registering with HMRC is free, so setting up as a sole trader doesn’t technically cost anything. Alternatively, if you were to set up a limited company you would be required to pay to form a company with Companies House. If you use a formation agent these costs can escalate quite quickly.
  • Privacy. You don’t have to register your business with Companies House, allowing you to keep your business private.

Sole trader, the cons:

  • Unlimited liability. You and your business will be seen as one entity, meaning that you have unlimited liability for your business. There is no protection of your personal finances and assets.
  • Can be less appealing to clients. Limited companies have a certain prestige that sole traders do not have. This can become problematic when it comes to attracting potential clients.
  • Funding can be difficult. Sole traders are seen to be riskier than other business structures, and so are less likely to secure funding from traditional sources such as banks.

Limited Company, the pros:

  • Limited liability. As a business owner you won’t face any personal liability. Shareholders will only be liable for any debt that the company incurs.
  • Tax benefits. Limited companies are taxed on their company profits, which is usually at a rate of 19%. Setting up as a limited company gives you the opportunity to plan a little more and be more flexible in your remuneration (how you get paid). You can choose how much to draw from your limited company and plan your personal taxation accordingly.
  • Protection. Once you have registered your limited company that name is protected by law and no one else can use your company name.
  • Professional. In some industries, trading as a limited company can provide a more professional image. Especially when working with larger companies, it may be that they will only want to work with limited companies rather than sole traders.
  • Expenses. As long as the expenses are ‘wholly and exclusively’ for business use then you can pay for certain things through the company. Doing this can reduce the company profits and therefore the amount of corporation tax that you pay. It also saves you the personal expense of paying for business related items from your personal salary.
  • Borrowing power. A limited company can establish its own credit rating which in turn can support borrowing if required to invest in the business.

Limited Company, the cons:

  • Additional administration. There is much more business admin to be done, and you will need to stay on top of your deadlines and obligations because there are penalties for late submission of key returns! These include annual accounts, VAT returns (if registered), payroll submissions, personal tax return and confirmation statements, to name just a few!
  • Accounts in public. Every year the company will have to prepare accounts and submit these to Companies House, where they will then be publicly available for anyone to see.
  • Higher setup costs. The initial costs of setting up can be pricey. You may also find your spend on Accountancy services is generally higher than that of a sole trader as there is more financial upkeep to be done.

Still unsure about whether to be a sole trader or limited company?

Don’t worry, it’s not an easy decision! There’s a lot to consider, and the route you take depends on your personal circumstances as well as your plans for the future.

If you’re unsure on what to do, we recommend speaking to an accountant for guidance.


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