Sole Trader vs. Limited Company: Top 10 Considerations

  • 6 min read

Sole Trader vs. Limited Company is an important consideration for many individuals. The biggest difference in a Sole Trader vs. a Limited Company comparison comes from a business perspective.

A limited company limits the liability of directors and shareholders and empowers your business to grow, hire employees in the future, find finance and borrow money (more easily, once you have revenue). As you make the decision to form a limited company, you need to think through what that means from both a business perspective and other important considerations such as tax.

Many business service providers prefer dealing with Limited Companies vs Sole Traders (as do many customers, particularly if you are offering your products and services to businesses). You can read more about the Top 5 benefits of a limited company in our blog.

As with many business options, Sole Trader vs. Limited Company, both have advantages and disadvantages. Many people often ask whether there are specific tax benefits to forming a limited company (vs remaining a sole trader). If personal income taxes or other tax matters are the main consideration in your decision making, we strongly recommend that you speak with an accounting practice before forming a company.

There is no one right answer, in the Sole Trader vs. Limited Company debate, that fits every circumstance. Every freelancer, tradesman, consultant and other professionals should weigh the pros and cons of each form of trading, and ideally consult with an accountant regarding tax considerations that may be involved.

If you want to learn how to quickly form a limited company please check out our guide.

Sole Trader vs. Limited Company:

1. Separate Legal Entity

A Limited Company is a separate legal entity and is considered a ‘judicial person’, meaning that you can separate you as an individual from your business.

2. Limited Liability

A Limited company limits the liability of individual shareholders & directors to the nominal value of the shares that they own in the company (if you form a limited company for your business you will be a shareholder and a director of your company). Please note that if you or the company commits fraud or other crime, a limited company will not protect you as an individual. The limited protection is primarily there to ensure that companies can innovate and take the commercial risk, in the ordinary course of business, with a limitation on how much directors and shareholders are liable for financially in the event the business of the company deteriorates.

3. Tax & Document Filings

At the same time, a limited liability company has tax and document filing requirements (normally referred to as statutory requirements) that are more burdensome than a personal income tax for sole traders.

4. Sole Trader’s Unlimited Liability

In contrast to a Limited Company, Sole Traders are personally liable for any business debts that are outstanding if the business fails. There are insurance policies that may be available to help with this risk, but small print matters a lot. The insurance may or may not help your specific line of business and the amount of debt that you may have.

5. Hiring Employees

If you intend to hire employees, then a limited company is a better business structure for your business. That is because your liabilities as an employer increase and payroll operations are better done within a limited company.

6. Business Partners

If you have or plan to have business partners then a limited company is a very efficient way to set up your business as all the partners can be shareholders & directors in the business. You can also have a shareholders agreement that can set out the rules on how you work together.

7. Legal Disputes

As a Sole Trader, you will be sued personally in the event of any legal disputes. For a Limited Company, any business legal disputes will be between the company and the other party. Generally, in the UK, it is rare when a Director of a limited company gets sued in commercial disputes that relate to the company’s business. Please note that this is only for the ordinary course of business matters. In the event of fraud and/or any other crime, you will be personally liable as a Director.

8. Money

As a Sole Trader, your business account is the same as your personal account. You can borrow from your business bank account for your personal needs. If you run a Limited Company, then it is much more difficult and expensive (due to Tax regulations) to borrow money for your personal needs from the company’s bank accounts. This is a relatively complex tax topic and we strongly advise talking to a tax professional. Here is a good HMRC guide on the topic.

  • If you would like to pay a salary to yourself or others, HMRC’s guide is a good starting point.

9. Pension

As a Sole Trader, you can only have a Personal Pension scheme. Limited Companies have more options in terms of pensions schemes and potential benefits that may be set up for Directors and Employees. Here is a good HMRC guide on how to set up an employer’s pension scheme. Again, we strongly recommend that you speak with a professional accountant if this is relevant for your considerations.

10. Accounts

As a Sole Trader, you file additional business income tax forms with HMRC. The accounts are slightly more complex than your personal income tax forms. They will include information about your sales/revenue, business expenses etc. You are not required to keep formal accounts (such as a Profit & Loss statement or a Balance Sheet). HMRC has a good guide on setting up as a sole trader. You may also find this tax calculator helpful from Ecommerce Accountatns (there are others in the market, we found their presentation to be the easiest to read). Please note that this is for illustration purposes only. Please always consult accountants in person.

  • As a Limited Company, you must prepare & file annual accounts with Companies House (this is a legal requirement under the Companies Act). You will also need to submit accounts to HMRC (online). Accounts must be prepared in accordance with accounting standards. Check out this HMRC guide on filing limited company accounts.

In summary, in the Sole Trader vs. Limited Company considerations, Limited Companies have many positive business benefits. That is why almost 700,000 limited companies are formed every year in the UK. At the same time, being a Sole Trader may be the right answer if the ins and outs of running a company are not your cups of tea.

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