Sole Trader vs Limited Company?

Sole Trader vs Limited Company

As a self-employed individual, one question which you ask yourself is should I stay as a sole trader, or form my own Limited Company.

What is a sole trader?

A sole trader is basically a self-employed person who is the sole owner of their business. It’s the simplest business structure out there – which is probably why it’s the most widespread – and you can set up as one via the GOV.UK website (you’ll need to do this for tax purposes).

What is a limited company?

A limited company is a type of business structure that has its own legal personality, separate from its owners (shareholders) and its managers (directors). This remains the case even if it’s run by just one person, acting as shareholder and director.

Sole trader vs limited company

Now, setting up as either structure will bring its own aids and shortcomings, so starting with the sole trader option let’s take a closer look…

Advantages of staying as a sole trader:

  • Easy to set up and somewhat little paperwork, other than an annual self-assessment tax return.
  • Greater confidentiality than incorporated businesses, whose details can be found via Companies House.
  • If you are a sole trader then you will be relieved to know that IR35 will not affect you as it is only applicable to limited company directors.
  • Simpler accounts – A sole trader in the UK can operate a very basic accounting system. Provided supporting evidence is retained to show the basic accounts are realistic and the income and expenditure statement accurate for basic tax purposes.

Disadvantages of staying as a sole trader:

  • Sole traders have unlimited liability, as they’re not viewed as a separate entity by UK law. This means that if the business gets into debt, the business owner is personally liable. As such, sole traders could lose personal assets if things go wrong.
  • Raising finance can be tricky, as banks and other investors tend to prefer limited companies. This limits the expansion opportunities of sole traders.
  • Tax rates on sole traders aren’t always as kind as they are on limited companies. When you reach a certain level of earnings, it might not be quite as lucrative to stay a sole trader.

Advantages of staying as a limited company:

  • Unlike a sole trader a limited company has the benefit of limited liability, as incorporation forms a legal distinction between the business owner and their business. This means that personal assets aren’t exposed – you only stand to lose what you put into the company.
  • Broadly speaking, limited companies stand to be more tax efficient than sole traders, as rather than paying Income Tax they pay Corporation Tax on their profits. As things stand this offers a kinder tax rate, meaning forming a limited company can be more profitable. In addition to this, there’s a wider range of allowances and tax-deductible costs that a limited company can claim against its profits.
  • Once you’ve registered a company name nobody else can use it, in contrast to sole traders who aren’t offered the same protection.
  • Diverse, better, and possible exit strategies are available to execute while you are trading through a limited company structure.

Disadvantages of staying as a limited company:

  • Life as a limited company brings added responsibilities. These come in the form of what’s called the Director’s Fiduciary Responsibilities, which basically outline what a limited company director must do legally. You’ll need file a yearly annual return for one, as well annual accounts.
  • Thanks to these added responsibilities going limited can be costly and time-consuming, as you’ll need to either deal with this extra paperwork yourself or hire an accountant to handle it. You’ll need to pay a fee to incorporate too; check out how to set up a limited company.
  • In contrast to sole traders information on your business can be found via Companies House, details on directors and your company’s earnings required to be shown publicly. This sort of transparency may not appeal to all.

Eventually then, it’s important to evaluate the difference between sole trader and limited company, as which structure you select could impact on everything from profits to paperwork. Don’t rush into any choice and speak to us if you’re unsure, as our expertise can be invaluable when it comes to the tax facts.

How can Birchtree Sullivan help?

At Birchtree Sullivan, our sole trader accountants and limited company accountants have the required knowledge and experience to help you make the right decision. We can make the change as smooth as possible.

So get in touch with us today for more information, contact us on (+44) 0207 183 9448 or email:

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Sole Trader & Limited Company Calculator

Don’t let the machine trick you!

One of our dedicated accountants will send you a detailed pdf report along with the commentary that would illustrate how much you can earn through a Limited Company while comparing being a Sole Trader. The illustration we provide considers maximum amount a company could extract for its shareholders. Simply fill in the information requested below.