Limited Company or Sole Trader?

Limited Company or Sole Trader?

Before you even start to think about running a business, you have this major question over your head. If you choose the wrong path, it could cause you a bit of a headache at a later date. There are definitely pros and cons for both options, but here are some things to consider when choosing which is the best option for you.

What is a sole trader?

As a sole trader, you’re essentially the same as a self-employed freelancer. It’s the most straightforward business structure and therefore, it is the most popular. Many just trade under their own name, but you can also pick a name to trade under. You will be the sole owner of your company and can even register for VAT like bigger companies.

To register as a sole trader and to find out more about what names you can use, what tax you have to pay etc., check out the’s page on registering as a sole trader.

What is a limited company?

A limited company is a business that’s an entirely separate legal entity from its owners. This is even the case if you’re the only one who owns or has shares in the company. As the director of a company, you will be responsible for the daily running of the business and all the financial and legal decisions. However, the company’s liabilities (and assets!) are completely separate to your own.



We will take a look at the differences between a sole trader and a limited company in different categories:


This is the absolutely major difference between a sole trader and a limited company. As a sole trader, there is very little distinction between your business and yourself. Therefore, any debts that the company has, you also have. All your personal assets, including your house or your car, could be at risk if things go wrong with your business. Being sued could turn into a really ugly problem as it affects you personally.

As a limited company, your personal assets are completely separate from your business. So, if things go wrong with your business, you can close the company and even file the company for bankruptcy, and nothing will affect your personal assets. Your company is limited to what it can pay out to its creditors, and you would not need to personally put in any money to fulfil these obligations.

Raising Finance

Raising finance is tricky as a sole trader as it all depends on your personal credit rating. If it’s not looking good, you will never be able to raise money for your business. Plus, affecting your credit rating will then affect your chances of borrowing money when you want to buy a house etc.

A limited company has its own credit rating, and you can usually borrow a higher amount against your company.



As a sole trader, there is a LOT less paperwork! Apart from the self-assessment tax return(which directors of companies also have to fill in), there’s not much else to do.

As a company director, you will need to fill in a whole host of other paperwork, such as corporation tax return, company accounts, annual return etc.

Usually, if these are submitted late, you end up with a fine and can actually get into serious trouble as a director.


All information about limited companies, including the names and addresses of shareholders, directors are completely public and can be found on Companies House. You can even find details of their earnings as a company here.

As a sole trader, you can keep this stuff private, making it a lot more appealing to many people.

Profits & Tax

As a limited company, you have so much more earning potential. Sole traders get to keep their entire profits, but then they pay National Insurance Contributions (NIC) and income tax on it as the whole lot is considered income.

In a limited company, you can claim more business expenses, such as mileage allowances, business trips expenses, phone bills etc., which reduces the profit the company makes. You pay corporation tax on these profits, but then you can pay yourself in the form of a salary and dividends, which are taxed at a much lower rate.

The rules on tax, dividends etc. is rather complicated, so we suggest you speak to an accountantabout all of this!


Having a registered business often instils confidence, rather than just a one-man-band. Some companies would even flat-out refuse to work with someone who is not incorporated as a company. Many people consider a company much more successful and reputable than a sole trader and therefore think they would do a better job.

Having a limited company may then open up doors for you and present you with opportunities you wouldn’t have had as a sole trader.


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