Should you be a Sole Trader or a Limited Company?

One of the most important decisions you’ll have to contend with is the structure and legal status your business will use moving forward. Will you operate as a sole trader or as a limited company?

Small enterprises and self-employed tradespeople may prefer the simplicity and control over earnings offered by sole trading. While those with ambitions of starting a larger company with lots of employees might be tempted by the security that registering as a limited company offers.

What it all boils down to is your individual business model and goals for the future.

Setting up as a sole trader is the most popular legal structure in the UK. Approximately 3.4 million sole proprietorships were created in 2017. Sole traders accounted for 60% of small businesses in the UK. There were also 1.9 million limited companies, making it the second most popular legal structure.

Even though sole traders are the most popular option for the small business owner, there are clear benefits and advantages of having a limited company.

Becoming a limited company can protect owners from these risks by giving them limited liability. But it can also mean a lot more admin and fiduciary duties for the directors.

For many smaller businesses or self-employed tradespeople, being a sole trader offers a few financial advantages. It also brings an increased level of risk.

The structure you choose can have an impact on almost every aspect of your business. This includes how much tax you will pay and what earnings you can make. In addition,  what happens should your company get into difficulty.

What might work for one company will not necessarily work for another. So, it’s vital that you weigh up the pros and cons of both and make an informed decision.

sole trader

First of all, here are some clear definitions:

Sole Trader

A sole trader is a self-employed person with full ownership of their business. It does not have a separate legal identity from that of the owner. That means that a sole trader takes full liability.

To become a sole trader, you must register using the government portal within three months of founding your business.

A Limited Liability Company

A limited liability company is one which is legally distinct from the identity of the owner. It has a unique company identity, which must be registered (for a small fee) with Companies House.

Because of this, there may be more than one owner or director, and they will have limited liability — meaning their personal finances won’t be affected should the business struggle financially.

Now that we are clear on the above, here are the key areas to keep in mind when making the choice between being a Sole Trader and becoming a limited liability company:


Here all the risk lies with the Sole trader. If you want to operate as a sole trader, you will be completely responsible for your business and its finances. As a sole trader, the business owner and the business are treated as one entity. Whereas, with a limited company the business itself is a separate entity in the eyes of the law.

If you have business debts as a sole trader or your business goes bust your personal finances and assets are in danger. This is because legally there is no difference between your assets and the business’ assets.

If you are a sole trader then you will need to make sure that you have various different small business insurance policies in place to avoid getting sued personally. As in the eyes of the law, you and your business are the same, without insurance, you could be sued personally.


Sole traders keep all of their earnings after tax, which is paid via the self-assessment system. This means that your earnings are entirely dependent on your performance that year. So while there’s the potential for large profits, there’s also the risk that you won’t make enough money to earn a decent salary.

The owners of a limited company draw their earnings in the form of a salary, which is taxed at standard PAYE rates. They can also draw their earnings in the form of bonuses and dividends, subject to overall performance.

The tax-free allowance for dividends are £2000 — meaning that limited company directors will face a reduction in tax-free earnings from these additional sources of income.


Another very prominent advantage a limited company has is that operating your business this way is more tax efficient.  This is because a limited company owner only has to pay corporation tax and dividend tax.

Whereas a sole trader will have to pay tax on all of the profits that are above their personal tax allowance (£11, 850 for the tax year 2018/19).

Annual accounts

A disadvantage of having chosen a limited structure is that as a limited company owner you have to prepare annual accounts. These need to be filed with the Companies House.

You will also need to file a full corporation tax accounts for the HMRC. Whereas, if you are a sole trader you are under no obligation to actually file any of the accounts that a limited company owner has to.

As a limited company owner, you need to make sure that you seek the help of a limited company accountant to ensure that your accounts are thorough.

Image / Perception

A limited company may come across to businesses as a better model to work with than a sole trader. This again links back to the limited liability of a limited company.

Businesses, contractors, clients etc. are more likely to work with a limited company. Why?  Their perception is that a limited company is more professional. A limited company can build a good reputation, which makes it more credible to any parties which want to work with your business.

A sole trader legal structure for your business is the easiest to set up. That’s why it has been proven to be such a popular option. However, there are clear advantages to running your business through a limited company structure.

When making the decision between being a sole trader or a limited company it’s important to consider all the above factors

Ensure that you have weighed up the pros and cons of all legal structures. See what fits you and your business best.

Whichever path you choose, it’s important to understand that your decision isn’t final. It is always possible to change at a later date.

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