Sole trader vs limited company – here’s which you should choose

Nov 2, 2023 | Blog

Deciding between setting up as a sole trader vs a limited company can be difficult, particularly if it’s your first time working for yourself. Both business structures come with their own strengths and weaknesses, and the best choice for you will depend on your unique circumstances.

So which should you choose, sole trader or limited company? Let’s weigh up your options.

Sole traders

Sole traders are self-employed and run their own business as an individual. As a sole trader, you are the business, and you don’t have a separate legal identity from it.

You can have employees, but you run the show, take home the profits and are personally responsible for any losses or debts the business incurs.

Pros and cons

It’s a lot cheaper and easier to be formally recognised as a sole trader than to start a new limited company. You just need to register for self-assessment through the HMRC website and pay taxes at the end of every financial year.

There is also less time-consuming paperwork involved, making this business structure an attractive option for first-time business owners.

You won’t need to rely on board members or other directors to make major decisions, either. The buck stops with you, so implementing changes into your business is much quicker.

Accessing funds is also more straightforward, and if you don’t have any employees, 100% of the profits after tax will go directly to you.

However, while sole traders can still claim expenses on their self-assessment returns, limited companies are eligible for more tax relief schemes.

Being legally indistinct from your business will also make you more liable if something goes wrong. If your sole trader business goes into debt, your personal assets may be put on the line.

Furthermore, many investors consider sole trader businesses too risky compared to limited companies, and you may be overlooked for funding opportunities as a result.

Limited companies

A limited company, meanwhile, is legally separate from its owners. While most limited companies have several directors and shareholders at the helm, you can set one up by yourself.

This kind of business structure can be more profitable, and may be your best option if you have growth ambitions. However, there are stricter rules and regulations you’ll have to contend with as a company director.

Pros and cons

Limited company means limited responsibility. If your business goes into debt, it is responsible for its own actions and your personal assets will be much safer.

This kind of business structure also qualifies for a wider range of tax-deductible expenses and allowances that enable you to reduce your personal tax liabilities as director. You can further increase your tax efficiency by paying yourself a salary and topping it up with dividends.

Furthermore, becoming a limited company director offers a little more prestige, making it easier to attract clients and investors.

That said, setting up and running a limited company is more complicated and involves more paperwork and admin than working as a sole trader.

You’ll need to register with Companies House and pay a small fee to set up, file a corporation tax return each year, as well as meet various other obligations to the taxman.

Limited companies also have limited privacy. Once you’re registered, personal details such as your name and address will be made available for all to see on the Government website. If you have other directors or shareholders, you’ll need to publish their information as well.

Making your decision

At the end of the day, the best choice for you will depend on how you want your business to run. Incorporating a business may be a no-brainer for some entrepreneurs, while becoming a sole trader may make the most sense for others.

The good news is, you don’t have to decide by yourself. We’ll be by your side from the very start to help you figure out the best structure for your business.

And once you’re all set up, we can shoulder some of that administrative burden for you, giving you more time to focus on making your venture a success.

Get in touch with our friendly team to talk through your options and take control of your business’s future.

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