Sole Trader or Limited Company?

Sole Trader or Limited Company

When you take the huge decision to ‘go it alone’ and set up in business, you might be wondering if it’s better to set up as a sole trader or a limited company.

You might have already done your research on this and spoken to friends and contacts who are also in business to get their opinions.

But the long and short of it is that what is right for them may not be right for you.

We’ve put together a few points for you to consider before you decide which route is best for you; but first let’s start with what a sole trader and a limited company actually are…


Sole Trader

You are basically the business.

You can keep all your business profits after you’ve paid the tax on them, but you are also personally responsible for any losses that your business makes.  In a worst-case scenario, you would have to find the money to repay any losses out of your own funds.

Extracting cash from the business is easy…there is no additional tax to pay.

There is no actual need to set up a separate business bank account, although you may prefer to keep your business transactions completely separate.

Your year-end will most likely be 5 April, although HMRC accept anything between 31 March and 5 April.


Limited Company

This has a legal identity of its own.

Your own personal assets and income are separate from those of the company, and this gives you what is called ‘limited liability’.

The company owns all the profit and pays the tax.  Payments are generally made to you by a mixture of salary and dividends, which you pay personal tax on each year.  But you can only take a dividend if the company is showing a profit.

If you need to borrow money from your company and you don’t repay it within 9 months, you have to pay a tax charge on the outstanding amount to HMRC.

Your accounting costs are higher if you are a limited company.  There is a lot more compliance involved and hoops that your accountant must jump through, so it takes longer to complete.

A separate business bank account in the limited company name is a legal requirement.

You can choose your year end.

You may also have heard the term ‘Self Employed’?  Well, this refers to the way you work rather than your business structure, so it means you are working for yourself and not for an employer.


So back to the points to consider…


Your industry

Ask yourself how your competitors in your industry are set up…if they are predominantly one or the other, you might want to follow suit.

Some clients you hope to have may only want to work with freelancers who, for example, operate as limited companies.

You may even want the kudos of operating as a limited company?



If you think you might need to employ staff in the not too distant future, operating under a limited company will give you protection from any employment claims.

If you are a sole trader and have staff, you are leaving yourself personally vulnerable to any employment claims.



How high your sales are for the year will determine whether you need to register for VAT.

Sometimes it’s better to become VAT registered from the very start.  For example…if your customers are mostly VAT registered, they can reclaim the VAT you are charging them anyway; and it also means that you can reclaim all relevant VAT on allowable purchases for your business.

If you aren’t VAT registered, you may have an advantage when quoting for work to non VAT registered customers.  If your competitors are charging VAT, you can undercut them by at least 20% which is the usual VAT percentage you have to apply on your sales.

However, being VAT registered means you need to be sure your business can pay any VAT you owe to HMRC.  Often clients like the protection of being a limited company so they can eliminate any personal liability.  For example…if you ever can’t pay your VAT bill.


One last thing to note…

There is nothing stopping you from starting your business as a sole trader, seeing how it progresses, then making the decision to incorporate into a limited company later.

Yes, there will be accounting costs associated with doing this, because as a sole trader everything is yours.  You effectively sell everything to the limited company, so it needs to be treated correctly in your accounts.  And it could also mean a tax liability for you personally on the profit in your business at that point.  But it’s all about choosing the route that is best for you.


If you’re still not sure which way to turn on this, please get in touch with us.  We have a lot of experience working with both sole trader and limited company clients and we can help you decide.  Just fill in our Get Moving form and we can hopefully help you.  Or alternatively head to one of our socials to follow us for regular updates…