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Sole trader or limited company? Key considerations

5 min read

Deciding whether to set up as a sole trader or a limited company will be one of the first things you will have to decide as a new business owner. For some it may be an obvious choice to make but for others it may be less clear cut. There are benefits and disadvantages to both types of business, so it’s a good idea to familiarise yourself with the ins and outs of each before making a decision. Here, we’ve highlighted some of the key things you need to know to help you decide which approach might be right for your business.

Sole traders

As a sole trader, you own and manage your business yourself. It is important to know you’re personally responsible for the money it makes or loses, meaning the profits (after tax) are all yours but so are the debts – this is known as “unlimited liability”.

Registering as a sole trader is very simple; just register with HMRC for Self-Assessment tax returns. You are also in charge of keeping financial records for the business, although you may want to pay an accountant to submit your Self-Assessment tax return on your behalf.

Private limited companies

As a private limited company, on the other hand, your business must register with Companies House and the company will have its separate own legal personality (independent from its shareholders) and responsibilities. It must have one or more registered ‘directors’, who are responsible for running the business, and the business is owned by the shareholder(s) and their level of ownership is determined by how many shares they each hold (if the business has more than one shareholder). The directors of the company may also be shareholders of the company.

You’ll also need to create a ‘memorandum of association’, a legal statement formally agreeing to set up the company signed by its initial shareholder(s), and ‘articles of association’, which outlines how the company will run, for example when the director has a final say on any decisions made by the board. You’ll also need to make a statement of compliance confirming that the requirements of the Companies Act 2006 have been complied with and pay a registrar’s fee.

You’ll need to notify Companies House of any changes to these details, for example if the board of directors or the share structure changes. You would also need to notify Companies House if the company takes out a mortgage or a secured loan.

Sole traders: advantages

+ Less regulation. Setting up and closing down a sole trader business is more straightforward.

+ Freedom to make decisions. You’re the boss. As the only person that owns and manages the business, you have autonomy on any decisions being made in the business, such as whether or not to take on a particular project, or invest in new equipment or training.

Sole traders: Disadvantages

– Sole responsibility. One of the main risks of becoming a sole trader is it’s more of a personal financial burden on you – as the only person that owns and manages the business, keeping the work coming in is your responsibility, which can often be stressful and tiring. You’re also personally responsible for all the debts/financial commitments of the business.


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Private limited companies: advantages

+ Legally separate entity from the shareholder(s). This means that the debts and profits belong to the company, rather than the company’s shareholder(s) or any individual directors.

+ Formally agreed terms. If you’re going into business with someone else, operating as a private limited company gives you both formally articulated legal rights over your share in the business.


Private limited companies: disadvantages

– It’s more complicated to register the business and to dissolve it

– Decisions can take longer. Any major decisions about the business would need to be agreed by the director(s) of the company, which can be time-consuming.

– There is more administrative burden. Failure to comply with filing requirements, such as filing annual accounts and confirmation statements each year is a criminal offence which can result in directors being fined personally in the criminal courts.

Sole trader vs private limited companies tax: some key differences

Another consideration might be how much you’ll pay in tax.

As a sole trader, you’ll be taxed on the profit your business made, and the tax rate is in line with national income tax rate that you’d pay as an employee remunerated via PAYE. Find out more about the income tax bands here.

As a director of a private limited company, your tax liabilities are a little more complicated. As a director, you can draw a salary as any employee would. Once all the business’s expenses, including directors’ salaries, have been paid, it is then liable to pay corporation tax of 19% on any profits in respect of each financial year end.

Once that’s been paid, you may wish to draw a dividend, which is a portion of the company’s net profit based on your share as a shareholder in the company. Income earned from dividends is liable for tax as well, but the tax rate is lower than the income tax rate.

Important Note:
Asto does not provide advice. You should not take anything in this content as any form of investment, tax, financial, legal or other advice.  We have provided this content for your information only.  You should not rely on it.  Asto is not responsible for the accuracy or completeness of this information.  You should seek independent advice as necessary.