Sole trader or limited company – which structure is best for my business?

Here, we outline the pros and cons of being a sole trader and a limited company to assist you in making your decision. Speaking to you accountant will also help, our accountants are experienced and will be able to advise you. 

What are the differences between a sole trader and a limited company?

Sole trader 

A sole trader is a self-employed individual trading as a business on their own. The individual and the business are one entity. There is no requirement for formal registration with Companies House. 

Limited company 

A limited company is a separate legal entity. It operates independently from its owners and the earnings of the Company belong to the company, not to individuals. 

Which is better – sole trader or limited company?  

The best option for you will depend on your circumstances, the size of the business and future plans. 

Both structures have their pros and cons and speaking to your accountant will be crucial in making an informed decision on sole trader vs limited company.

Sole Trader

Pros	Cons
Easy to set up There’s no need to register with Companies House.	Unlimited liability You take on all the risks and liabilities of covering business debts.
Fewer reporting obligations You’ll need to submit an annual self-assessment tax return to HMRC but there’s no need to file your accounts formally.	Less tax effiicient Sole traders pay income tax at a higher rate than corporation tax, as well as National Insurance. Sole traders are taxed on business profits.
Business control Business decisions are yours.	Limited funding opportunities Lenders and investors may favour limited companies so raising finance to grow your business can be difficult.
Keep all profits You’ll retain all the profits after tax.	Less credibility Some organisations may prefer working with limited companies.
More privacy Business finances aren’t disclosed anywhere.	No business name protection Your business name is not legally protected.

Limited company

Pros	Cons
More tax efficient Limited companies pay corporation tax at a lower rate than income tax. Business owners and directors are taxed on income extracted from the company.	Reporting obligations Companies must file accounts to Companies House and HMRC. A Company Tax Return must also be submitted to HMRC. A Confirmation Statement and record of Persons with Significant Control must also be reported to Companies House.
Limited liability Owners are not personally liable for business losses.	Less control Control is shared with shareholders and decisions may need a vote.
Funding opportunities Lenders and investors tend to favour limited companies due to the level of legal protection and tax benefits.	More complex to set up Involves more paperwork and administration, including registering with and paying a fee to Companies House.
More credibility Operating as a limited company instils confidence and trust among suppliers and customers.	Less privacy Accounts and other documents filed with Companies House are on public record.

Profit extraction – how to pay yourself

Sole trader

Business profits are taxed as personal income regardless of how much you take out of the business. The amounts you do take out are drawings, and you are not taxed on these.

Limited company

Business owners are taxed on income extracted from the company, often in the form of dividends.

Tax rates

As mentioned above, there are tax differences between the business structure type. Here we’ve summarised the 2024/25 tax rates for sole traders and limited companies.

Sole trader

England, Wales and Northern Ireland (2024/25)

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Basic rate	£12,571 to £50,270	20%
Higher rate	£50,271  to £125,140	40%
Additional rate	Over £125,140	45%

Scotland (2024/25) 

Band	Taxable income	Tax rate
Personal Allowance	Up to £12,570	0%
Starter rate	£12,571 to £14,876	19%
Basic rate	£14,877  to £26,561	20%
Intermediate rate	£26,562  to £43,662	21%
Higher rate	£43,663 to £75,000	42%
Advanced rate	£75,001 to £125,140	45%
Top rate	Over £125,140	48%

Limited company

Profit banding	Corporation tax rate
Under £50,000	19% small profits rate
Over £250,000	25% main tax rate
Between £50,000 and £250,000	25% main tax rate less marginal relief

TaxAssist Accountants can help 

We have experience helping business owners understand their options and can help you reach a decision. Please contact TaxAssist Accountants, call us on 0800 0523 555 or use our online contact form to speak to our accountants. 

FAQs 

Can I change from being a sole trader to a limited company?  

Being a sole trader is a good option for many small business owners and self-employed people starting their own venture as it’s the easiest business structure to set up. However, there may become a point when you decide it’s better to be a limited company and it is simple to make the switch.   

What are the differences between a sole trader and limited company? 

The main difference is that owners of limited companies have limited liability and risk, whereas sole traders hold all the risk and liability. Additionally, limited companies have more reporting obligations. 

Is it better to operate as a sole trader or a limited company? 

The better option depends on individual circumstances. There’s no one size fits all approach, instead you’ll need to balance the pros and cons to establish what’s right for your business. 

What are the key advantages of being a sole trader? 

The advantages include no formal registration and fewer reporting obligations. 

What are the main disadvantages of operating as a sole trader? 

Disadvantages include unlimited liability for business debts and potentially this structure may be less tax efficient. 

Date published 19 Jan 2024 | Last updated 10 Apr 2024

This article is intended to inform rather than advise and is based on legislation and practice at the time. Taxpayer’s circumstances do vary and if you feel that the information provided is beneficial it is important that you contact us before implementation. If you take, or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.

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