Article
Sole trader or limited company – which structure is best for my business?
Choosing a legal structure is one of the most important decisions for a new business owner, and understanding the options can be challenging.
By Catherine Heinen, FCCAHere, 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. |
Need help choosing the best structure for your business?
Contact TaxAssist Accountants for a free, no-obligation consultation.
Or contact usProfit 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 |
Need support with your start-up?
Contact TaxAssist Accountants for a free, no-obligation consultation.
Or contact usFrequently Asked Questions
Disadvantages include unlimited liability for business debts and potentially this structure may be less tax efficient.
The advantages include no formal registration and fewer reporting obligations.
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.
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.
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.
Date published 19 Jan 2024 | Last updated 29 Aug 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.
Catherine Heinen, FCCA
Catherine is a Technical Content Writer at TaxAssist Accountants, and a qualified accountant. With experience working at two accountancy practices in the UK top 50 accountancy firms according to Accountancy Age, Catherine has significant experience in accounts, tax returns and advising clients. Catherine ensures businesses, business owners and individuals are kept up to date and informed by providing concise and informative technical material.
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