balancing sleep trader versus limited company like boxes on a seesaw
Several clients have asked to discuss making the change from being a sole trader to a limited company, so we thought it would be a good idea to look at the pros and cons. 

Sole trader vs limited company 

Partnerships suit certain types of businesses, but most people choose to be either a sole trader or a limited company. 
 
According to government figures for 2020 there are around six million privately owned businesses of which three and a half million are sole traders (59%), two million are trading companies (34%) and 414,000 are ordinary partnerships (7%). 
 
A sole trader – as a sole trader you are a self-employed person and you are the sole owner of your business. This is the simplest business structure. For tax purposes you will need to set yourself up as a sole trader on the government’s website
 
It’s straightforward to become a sole trader but because you pay yourself, rather than receiving a salary from an employer, you will need to complete an annual self-assessment tax (SAT) return
 
You can keep all the profits from your business after tax to pay yourself or to reinvest in your business. Unlike a limited company, the details of your business don’t have to be published on the Companies House website. 
 
There’s no difference between you and your business for legal purposes so you will have unlimited liability for your business activities, including debts and losses. 
 
Raising finance can be a challenge because banks and investors generally prefer limited companies. In some cases, larger clients might also prefer to do business with a limited company rather than an individual. 
 
When you reach a certain level of earnings, you could find that it is better to convert your business into a limited company to become more tax efficient. 
 
A limited company – a limited company has its own legal identity which is separate from its shareholders, managers or directors. A company can exist even if it’s run by just one person who is the only shareholder and director. 
 
Unlike a sole trader, the company is legally separate from its owners, so you have more personal protection if it has debts. You can also protect your reputation because once you’ve registered your company name nobody else can use it. 
 
The company will pay corporation tax at 19% on profits, which is currently lower than the 40% payable at the higher rate of income tax when you earn more than £50,270 as a sole trader. You can also offset company profits against a wider range of allowances and tax-deductible costs. 
 
You can pay yourself a combination of salary and dividends which could be more tax-efficient for you. After your tax-free annual allowance of £2,000 you will pay 7.5% on dividends as a basic-rate taxpayer. If you are a higher-rate taxpayer you will pay 32.5% and as an additional-rate taxpayer, 38.1%. 
 
Dividends can also be paid to other shareholders in your business after your corporation tax has been paid, but only up to the amount of profits available. This can be beneficial if your other shareholders haven’t used all their tax-free or basic rate allowances for the year. 
 
However, limited company directors have more responsibilities which can add to the costs and the time it takes to administer your business. You will need to submit a company tax return each year as well as annual accounts and your own self-assessment tax return. 
 

The best structure for your business 

Your choice can affect more than profits and paperwork, so it’s a good idea to ask for some advice. Things like your business insurance could be affected, for example. The best business structure will also depend on your personal circumstances. 
 
Here are some of the pros and cons: 
 
Limited Company 
Sole Trader 
Be your own boss 
✔︎ 
✔︎ 
Easy to set up in business 
✔︎ 
✔︎ 
Work with a variety of clients 
✔︎ 
✔︎ 
Incorporate a company 
✔︎ 
✘ 
Pay yourself a combination of salary or dividends 
✔︎ 
✘ 
Pay Corporation Tax 
✔︎ 
✘ 
Limit your personal liability for business debts and losses 
✔︎ 
 
Whether you are just starting out or are thinking of making a change we will be happy to discuss these options with you and provide figures to show you how each will affect your business.  
 
Share this post:
Our site uses cookies. For more information, see our cookie policy. Accept cookies and close
Reject cookies Manage settings