Should you set up a Sole Trader or Limited Company?

Sole Trader and Limited Companies are two of the most common business structures in UK. If you’re just starting out, you may be wondering what the best option for you is.

We have helped hundreds of businesses on their business journey so we have a lot of experience with this decision.

In this guide, we’ll help you figure out the best structure for your business. At the end of the day, it is a personal choice, but you may favour one structure over another when you hear about the differences.

What’s a limited company?

A limited company is a type of business structure that gives your company its own legal entity separate from you – even if it’s just run by one person. You become the director and act on the behalf of your business.

What’s a sole trader?

Currently, being a sole trader is the most popular option in the UK. One of the key benefits of sole traders is that it’s very straightforward and simple, you register as self-employed and are the sole owner of the business.

How do I get paid as a limited company?

Those who choose to register as a limited company can either pay themselves a salary or dividends from the available profits. Due to this, your company needs to be registered with HMRC as an employer and on top of this, you’ll need to register for self-assessment yourself.

If you choose to pay yourself a salary, if you meet the threshold you may need to pay national insurance too. Many will give themselves a salary up to the personal allowance limit, then pay themselves through dividends (money left over from paying for business costs and expenses) for the rest as the first £2,000 is tax free.

How do I get paid as a sole trader?

When it comes to your payment, any profits after filing your sole trader tax return are yours to keep.



What is the difference between Sole Trader and Limited Company?

One of the biggest differences is that Sole Traders are personally liable to the debts of the business. Personal assets, such as your house and car, can potentially be used to pay your creditors.

Limited Companies are separate legal entities and your potential creditors can only claim against the assets of your company. Initially, setting up as a Limited Company can be more expensive and can be slightly more time-consuming. But there is also more security around your personal assets, it can provide more credibility in your industry and there are more tax incentives.

Pros and cons of each structure

 Sole Trader

  Pros:                                                                                                                                          

•   Simple to set up & shut down
•   Less legal filings compared to a Limited Company
•   You don’t have to prepare financial statements

   Cons:

• All your profits are taxed as your income, which can be up to 52%.
• Personally liable for debts.
• Lower tax credit than employees.
• You still need to prepare a tax return each year.

 Limited Company

   Pros

•  Low Corporation Tax rate
•   More tax reliefs and benefits
•   Credibility in the industry
•   Protection of private assets

   Cons

•   More corporate filings and deadlines
•   Large fines and penalties for non-compliance
•   Longer and more expensive to set up than a Sole Trader