What’s the difference between a Sole Trader and a Limited Company?   

As a Sole Trader (often referred to as Self Employed), the business owner and the business is treated as one legal entity.  As a Limited Company the business is a separate legal entity from it’s owners (Directors and Shareholders).  

This means that a Sole Trader is liable for personal and business debts (meaning that, if anything goes wrong, personal assets such as properties, savings and vehicles etc could be at risk).  A Limited Company’s liabilities are completely separate from the owners personal finances (if anything goes wrong, personal assets would generally not be at risk).

Limited Companies have many more reporting responsibilities such as (being registered with Companies House and adhering to strict filing and record keeping requirements) whereas being a Sole Trader carries less of an administrative burden.   

Which is better – a Sole Trader or a Limited Company? 

This is very much dependant on both the business and personal circumstances.

There are pros and cons of being a Sole Trader or a Limited Company. 

Setting up as a Sole Trader is cheap and easy to do and involves a minimal amount of administration and obligations.  Sole Traders may have difficulties in obtaining business finance, certain tax reliefs and creating the right impression to potential customers, as well as being personally liable for any debts that the business incurs.

Forming a Limited Company is more complex and involves more costs.  The business could benefit from finding it easier to obtain business finance, obtain grants and gain access to certain tax reliefs (such as Research & Development Tax Credits).  It can also be more tax efficient to trade via a Limited Company as well as giving the impression of being a larger business.  

Sole Trader Advantages-

• You only need to complete and file a Self Assessment Tax Return once a year with record keeping requirements kept at a minimum.   
• Your financial information remains private, unlike that of Limited Company which is partially on public display at Companies House. 

Disadvantages of being a sole trader 

• You are responsible for the business liabilities, if anything goes wrong and you are left with debts the business cannot afford, you remain personally liable meaning your personal assets could be at risk. 
• Obtaining business finance can be more difficult for a Sole Trader, lenders tend to prefer Limited Companies.  
• Being a Sole Trader can be less tax efficient dependant on the profits.  Sole traders pay taxes at rates of 20-45% plus National Insurances compared to Limited Companies who pay tax at 19% (increasing to 25% for some Companies in 2023). Sole Traders are fully taxed on the profits of the business regardless of what profits they physically withdraw.
• Some organisations prefer not to work with Sole Traders and often assume that they are a very small business.
• Your business trading name is not protected, anyone can use the same name as your business.

Advantages of being a limited company 

• A Limited Company is a separate legal entity from it’s owners (Directors and Shareholders) meaning that, as a business owner, you are not personally liable for the Company’s debts.
• Limited Companies pay Corporation Tax at 19% (to increase to 25% in 2023 for certain profit levels) rather than  up to 45% as a Sole Trader.
• Limited Companies qualify for certain Tax Reliefs (such as Research and Development) that are not available to Sole Traders.
• Withdrawing money from the Company can be structured in a tax efficient manner – Shareholders can withdraw Dividends that are free from National Insurance and have a lower tax rates.
• Limited Companies often have more funding available to them, both lenders and investors tend to prefer Limited Companies and, generally, more grants are available to Limited Companies.
• Trading via a Limited Company can create the impression that you are bigger than you are thus creating more opportunities with customers and suppliers, some organisations refuse to work with non-Limited Companies.  

Disadvantages of a Limited Company 

• Trading as a Limited Company involves more administration and record keeping than being a Sole Trader.   You will need to register with Companies House, file Accounts and a Confirmation Statement at Companies House as well as filing a Company Tax Return with HMRC.
• Any documents, including the annual Accounts are a matter of public record and can be viewed by anyone at Companies House. 

Can I change from a Sole Trader to Limited Company?

If you start your business as a Sole Trader, you may wish to become a Limited Company later on.  It is relatively straight forward, with the right advice to make this change.  

Many things may influence this decision, such as an increase in profit, wanting to obtain business finance, to boost the impression of your business or protect the business name.

Need Help?

If you would like to discuss any of the above or any other matter, please feel free to contact us.