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 also 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 clients pay 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.