Should I operate as a sole trader or limited company?

If you’re thinking about going self-employed to run your own business, an early dilemma you might have is whether you’d be better off running it as a sole trader or a limited company.

With each side having its pros and cons, it can be tough to decide which one would work best for you and your business. It’s even harder for an accountant to advise you on this without knowledge of your business.

Before we get into that, however, let’s look at the basics to give you an idea of what it means to run a business as a sole trader or a limited company.

Difference between sole traders and limited companies

The main difference between a sole trader and limited company can be gathered from their names.

First, a sole trader is an individual who runs a business and is solely responsible for its success or failure.
That means a sole trader is the business. What the business earns, you earn. What it owns, you own. And what the business owes creditors, you owe.

Limited liability companies, on the other hand, are legally separate from the business owners, hence ‘limited liability’. As we’ll see, it’s a subtle difference with huge ramifications.

Let’s also dispel some confusion that can arise between sole traders and limited companies. For instance, a sole trader can hire employees, while a limited company can operate without any, contrary to what some might believe.

And although you might think companies are larger than sole proprietorships, that’s not always the case.

So why choose one over the other?

Pros and cons of sole trader status

Being a sole trader is relatively simple and easy to administer, making it especially attractive for new businesses and individuals new to self-employment.

There is less paperwork, it requires fewer registrations and only one tax return has to be done a year – personal income tax self-assessment.

As sole traders’ profits are subject to income tax and National Insurance, it does mean you might have to cough up more than the director of a limited company, especially if your business is doing well.

Moreover, if your business gets into trouble, your assets could be on the line, including your home, if you don’t pay your creditors. And if the business goes bust, you could face personal bankruptcy and all the restrictions that brings.

Limited company pros and cons

Having gone through all that, you might think things could only be better with a limited company.

There are certainly some great benefits to running a business as a limited company, limited liability being at the forefront of many company directors’ minds.

Limited liability means that if your company can’t pay its debts, you, as a director, won’t be personally liable. There’s essentially a protective barrier between you and the business, so your personal assets will be safe. However, there are sometimes exceptions to this such as when you give a personal guarantee.

Owning a limited company also offers a more tax-friendly treatment of your profits, as you will pay your company 19% in corporation tax rate compared to the 20%, 40% and 45% income tax brackets that a sole trader would have to pay. However, there is tax on dividends if the profits are withdrawn from the company.

What’s more, company directors can be especially tax efficient when extracting profits from the business.

They do this by keeping their salary low, so they don’t have to pay much (if any) National Insurance. They can then top up their earnings by paying themselves in dividends.

Again, whist dividends are subject to tax there is no National Insurance on them, meaning that if you get it right, you could keep more of your personal income than you would as a sole trader.

Limited companies, however, tend to be more difficult to manage as they come with a range of statutory obligations.

For instance, you’ll have to register the company with Companies House and HMRC, submit a corporation tax return as well as a personal return, and put all your personal information (name, address, date of birth) online for the world to see.

Which structure should I choose?

It’s difficult to give a straight answer on a question that depends so much on your personal circumstances.

At Harries Watkins & Jones, however, we’re interested in giving straight answers, so broadly speaking, if your business is turning over more than £30,000 a year, you should consider setting up a limited company – that’s when tax savings start to significantly outweigh administration costs.

Get in contact with us to discuss which company structure might be best suited for you in more detail.


The information provided is of a general nature. It is not a substitute for specific advice in your own circumstances. You are recommended to obtain specific professional advice from an appropriate professional before you take any action or refrain from action. Whilst we endeavour to use reasonable efforts to furnish accurate, complete, reliable, error free and up-to-date information, we do not warrant that it is such. We and our associates disclaim all warranties. The information can only provide an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice.

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