Sole Trader or Limited Company: What’s the Best Option for You?

Sole Trader or Limited Company: What’s the Best Option for You?

Read Time: 6 Minutes


07 Dec 2018


Before you even think about starting up your own business in the UK, one of the first questions to ask yourself is: should my business be a sole trader or a limited company? 

Both options are viable ones for freelancers and entrepreneurs alike. However, tax implications, security and control over your profits will be the factors swaying your decision to become self-employed. But before we start exploring the pros, cons and which option is best for you, let’s start with some quick and easy definitions.


What is a Sole Trader?

Being a sole trader essentially means that you have sole responsibility over your business and its finances – everything is owned and controlled by you. It’s one of the most popular options for those just starting out in the business world because of how straightforward it is.

However, there is little distinction between your personal life and business life – and as a result, any debts or claims against your business become your debts, which can affect personal assets such as your house and savings.


Sole Trader Examples

The only requirement for becoming a sole trader in the UK is that you tell HMRC that you are self-employed. Because of this, there are tons of examples of this kind of business. Commonly, dental practices, small shop and café owners and online sellers are sole traders.
One example of a sole trader in the UK, who were finalists for sole trader of the year in 2017 is Ma Baker, an award-winning micro-brewery in Fulham, London. As well as offering freshly baked breads, this small business also runs baking classes and courses.


Sole Trader Advantages and Disadvantages

There are plenty of benefits to being a sole trader:
•    You have full control over how you run your business
•    It’s easy to register as a sole trader
•    You keep all profit from your business after tax
•    Information about your business can be kept private
•    Registering as a sole trader is free
•    It’s flexible – you can always change to a limited company later


However, here are some of the cons that come with this type of business:
•    Because you and your business are seen as one entity, any debts are solely your responsibility
•    Sole traders aren’t as tax efficient as limited companies
•    Being self-employed means that it can be harder to find that work-life balance
•    As it’s a riskier type of business, it can be more difficult to secure funding from traditional sources, like the bank


How to Register as a Sole Trader in the UK

To set your business up as a sole trader, there are a couple of requirements to consider first:
•    You must have earned more than £1,000 from self-employment between a set amount of time
•    You’ll need to be able to prove that you’re self-employed


You’ll also have the following responsibilities:
•    To keep record of your sales and expenses
•    Send a tax return every year
•    Pay income tax on your profits
•    To register for VAT if your turnover is over £85,000

You can find more information, and register for Self-Assessment, here.


What is a Limited Company?

A limited (ltd) company has ‘limited liability’, meaning that it’s seen as something separate to the business owner, and therefore won’t have as much of an impact on the business owner’s personal finances if debts or financial loss occur.

Companies house is the UK registrar of companies. Limited companies have to register with Companies House as one of two options:
•    ‘Limited by shares’ – owned by one or more shareholders and managed by one or more directors
•    ‘Limited by guarantee’ – owned by one or more guarantors and managed by one or more directors

You can check if the company name that you’d like is available by using the Companies House name availability checker.


Limited Company Examples

A lot of the UK’s biggest companies are either private or public limited ones. But, as we’ve mentioned above, there are a couple of different types of these. 

An example of a private limited by shares company would be construction equipment manufacturers, JCB. Limited by guarantee companies are usually charities, like Oxfam, or sports clubs and associations.

You may also have heard of public limited companies (PLCs). These allow their shares to be owned, sold and traded to the general public. Examples of this business structure include The Co-operative Bank and Barclays.


Limited Company Advantages and Disadvantages

Here are just a few of the benefits of running a limited company:
•    It’s more financially secure than a sole trader because you aren’t personally liable
•    You’ll only be taxed on your profits, making it more tax efficient
•    Once registered, your business’s name is protected by the law
•    Having a limited company can make finding traditional forms of funding easier
•    If you want to retire, it’s easier to pass a registered limited company on to someone else


However, you’ll have to keep the cons in mind when making your final decision on this kind of company formation:
•    There is a cost involved in registering your company, although this is currently only £12 for a private, limited by shares one
•    As there are different shareholders involved, ownership is diluted and you might not get the final say over any disputes
•    The rules around governing accounts can be a little bit more complex


How to Register as a Limited Company in the UK

To set your business up as a limited company, there are a couple of requirements you’ll need to fulfil first:
•    Your company’s name
•    An address
•    At least one director
•    Details of the company shareholder
•    Your SIC code

You can find out more, and set up your limited company, here.


Which is the Best Option?

According to the Federation of Small Businesses, the most popular legal structure for small businesses is sole trader (59%), with limited companies at 34%. A lot of businesses start of as sole traders and make the shift to limited companies over time – which is an easy transition to make.

The key decision, however, is down to what sounds the best to you – as a sole trader, you’re a self-employed business owner with more control and access to the full profit after tax. As a limited company, you’ll be a director and shareholder of the business, being paid either a salary or dividends but with more financial security.


Whichever business formation you choose, it’s only the beginning. Remember to check out our startup launch checklist to find out everything you need to know before starting a business and for your free checklist printout!



About the Author

Hi! I’m Laura and I’m the Head of instantprint. I’m dedicated to using my experience to help small businesses make the most out of their marketing.