Sole Trader Or Limited Company?

Many questions crop up when starting a business. Invariably, amongst the first will be the question over what legal structure it will trade under – sole trader, limited company or partnership. But knowing which one is right for you can be the devil’s own job. If you’re already on your journey, you will likely already have made this decision. But a quick outline of the differences can only ever be helpful! So, here goes.

Sole trader

Being a sole trader is the most common legal structure. In part, this is be because there are no set-up costs, and it’s simple to run. The only requirement is that you inform HMRC by 5th Oct of your business’ second tax year. As such, there is little paperwork. Another perceived bonus is that you don’t have any dealings with Companies House. So, your information is not held on public record.   

Being a sole trader means that you are entirely responsible for your business and its finances. So, if your business fails, your personal finances and assets could be in danger. Legally, your liability is unlimited. So if you’re a sole trader, it’s important to take out an insurance policy to ensure you are protected. That way if there are any legal disputes, you are personally protected from being sued. Remember, as a sole trader, the buck stops with you! So, make sure you take the necessary measures to ensure you are covered.

You and your business are treated as one single entity. This is significant for tax purposes. You will need to pay tax on any profits that exceed your personal tax allowance (for the 2020/21 tax year this is £12,500). This is calculated through the self-assessment system, and you will also pay Class 2 and Class 4 NICs. In comparison to a Limited Company, being a sole trader is generally believed to be less tax efficient. This is because there is less opportunity for tax planning via the self-assessment system. 

Limited company

While not as popular as Sole Traders, Limited Company’s come a close second. They entail more paperwork than Sole Traders, and you are required to deal with Companies House. Rest assured, though – it’s relatively straightforward. But you should be aware that your company details will be on public record. The main benefit of having a limited company is that you have limited personal liability should anything go wrong. As the business is treated as a separate entity from its owners, your own assets remain protected.

In terms of tax, limited companies are largely still thought to be more tax efficient. The company will pay corporation tax and employer’s Class 1 NICs on salaries. Meanwhile, staff pay employees’ Class 1 NICs on their wages. Under the limited company structure, there is greater scope for tax planning and as a shareholder you may wish to pay yourself dividends.

As far as the downside goes for limited companies, you are obliged to prepare annual accounts which must be filed with Companies House. Additionally, you also need to file a full set of corporate tax accounts for HMRC. As such, many limited companies choose to use an accountant to make sure the accounts are done thoroughly.



As always, if you would like to speak to a financial adviser, please do call us on 01243 767 469. Alternatively, you can email us from our contact page, and an adviser will be in touch.

Written by Steve Burns

Steve is a chartered financial planner who has been with Lewis Brownlee for over 20 years, who now heads up Lewis Brownlee Financial Services. Under his directorship, the firm has established itself as a specialist provider of professional, informed and impartial advice.