Sole Trader vs Limited Companies: What’s the Big Deal?

Starting a business is an exciting yet daunting experience. One of the pitfalls can be understanding the legal and tax implications of different business structures, the most common of which are sole traders and limited companies.

Deciding which business structure to choose can significantly impact your growth and profitability. Want to find out which is best for your business? Read on to find out.

What's the difference between a sole trader and a limited company?

A sole trader, usually reserved for freelancers and sole entrepreneurs, is where you are recognised as the same legal entity as your business. Setting up is simple, but you are liable for the business as a sole trader.

A limited company is what small and medium-sized businesses tend to operate. It’s a separate legal entity from you, so there’s less personal risk involved. It is, however, more complicated to set up and run.

There are 3.1m registered sole traders and 2.1m actively trading limited companies in the UK as of 2022. 

Pros and cons of being a sole trader

It’s less complicated to set up as a sole trader - all you need to do is let HMRC know so you can get your Unique Taxpayer Reference (UTR). You’ll need to submit a tax return each year once you earn over £1000 - an accountant can help you if you’re stuck. As a sole trader, you also have more control over the business and keep all the profits after tax.

The downside is any money you earn is taxed as income, so your rates can range from 20-45% (plus any student loan repayments). You’re also wholly liable if anything goes wrong or you make a loss, which could affect other assets you own. Some clients may also take a sole trader less seriously than a limited company.

Pros and cons of being a limited company

A limited company adds a layer of confidence and weight to your business which some customers will appreciate. 

As a limited company, any liability falls to the company rather than yourself. This is handy for any potential disputes or losses the business may make. Limited companies are also tax efficient: the corporation tax threshold is currently 19%, with more tax-deductible allowances so that you can keep more of your hard-earned profits.

There’s more administration associated with running a limited company: you’ll need to register with Companies House, set up an address if you want it to be separate from your home and file annual accounts. An accountant can help you stay on top of everything.

Can I change from being a sole trader to a limited company?

If your business is scaling up and you’re ready to make things official, you might want to leap into the world of limited companies. While there’s more setup needed for a limited company, it’s simple enough to make the switch.

The main steps you’ll need to take will be choosing a company name and registering with Companies House, then letting HMRC know about the move. You’ll also need to set up a separate business bank account if you haven’t already.

Discussing these things with a qualified expert before making the big switch is always best!

Final thoughts

Being a sole trader or a limited company entirely depends on your plans and goals for your business. Each has its advantages and disadvantages to consider when you’re first starting up. 

If in doubt, contact us today to discuss your options.