Limited Company or Sole Trader - What’s better? - CloudCo Accountants

Limited Company or Sole Trader – What’s better?

limited company vs sole trader

When starting a new business, one of the foremost things to decide is the company’s legal structure. It may be a sole trader, a limited company or a partnership.

A sole trader is owned by a single individual with unlimited personal liability for the firm, whereas a limited company’s ownership is divided into equal shares.

The most popular business structure in the UK is a sole trader. Based on the facts, sole traders are accounted for 60% of UK businesses, followed by limited companies.

Both legal structures have some benefits and limitations.

What is a Sole Trader?

A sole trader is a legal business structure where the person is self-employed and responsible for running the business solely. It’s the most straightforward business structure, hence the most popular one.

Benefits of being a sole trader

Sole traders are the simplest form of business, which is straightforward, flexible, and has few formal requirements.

Individuals who operate a business as sole proprietors have complete control over all business decisions, keep all earnings and have to pay more straightforward tax duties. In addition, the inexpensive beginning costs and few administrative requirements seem appealing to many business owners.

Here are the key benefits and most significant advantages of being a sole trader:

Simple Set-up & Administration

One of the most significant advantages of running your business as a sole trader business is its simplicity.

More Flexible Payments & Earnings

Sole traders can withdraw money from their salary to the firm in annual accounts as needed. These ‘drawings’ from annual accounts will be considered a wage on the Self-Assessment Tax Return.

Low start-up costs

The start-up costs of being a sole trader are relatively low. You do not need to invest in expensive office space or equipment, and you can often get by with just your laptop and phone.

Insurance Covering Personal Assets

Insurance firms that concentrate on business risks offer insurance to sole trader businesses that align their risk status with limited liability. That can help sole traders to protect their personal assets against corporate debts or legal claims.

Easier to Close Down

A sole proprietorship can wind up by paying any liabilities, collecting any payments owed, maintaining or selling any physical or proprietary assets, and distributing residual funds to the owner.

Drawbacks of being a sole trader

We’ll now look at some of the potential drawbacks and so-called business disadvantages of working in your own small business as a former sole business owner or proprietor:

Unlimited Responsibilities

You have complete responsibility, which means you are personally liable for the company’s debts and losses, whether due to unpaid taxes, office rent, or equipment expenditures.

Tax Implications

Sole proprietors have fewer tax planning options. Any profit you make is liable to income tax in the fiscal year it is generated.

Lack of credibility

Sole proprietors are less reputable than incorporated enterprises. This might make acquiring new consumers or securing contracts challenging.

Inadequate Separation

As a sole proprietor, you have no legal distinction between your business and personal finances. This implies you may lose your personal assets if you combine your corporate and personal funds.

Limited Growth Potential

It might be difficult for sole proprietors to expand their enterprises beyond a certain point.

What is a Limited Company?

A limited company is a legal structure with its own legally separate legal entity different from its owners and directors.

Benefits of being a limited company

The key advantages of conducting business as a limited corporation are a limited liability, tax efficiency, tax exemption, legal protection of personal assets and professional standing.

However, there are a few more limited business owner benefits accessible. Here are the key benefits that limited companies have:

Access to Finance

Limited companies are frequently more appealing to lenders than sole proprietorships or partnerships. Lenders are more confident that their money will recover if the firm goes bankrupt.

Tax Advantage

Limited corporations can take advantage of various tax advantages, including paying corporation tax at a lower rate than income tax.

Separate Legal Entity

A limited corporation is a legal entity separate from its owners. This means the corporation can both sue and be sued in its own right. It also implies that the firm’s assets are distinct from the owners’ possessions.

Ownership Transferability

Shares in a limited company are transferable more readily than a solo trader’s assets.

Professional image

Limited companies are more professional than other types of businesses. This can be advantageous when bidding for contracts or tendering for government work.

Drawbacks of being a limited company

There are also less favourable aspects of being a limited company, as you expect only benefits from it. However, the most apparent downsides fade despite the tax benefits, improved professional image, tax returns, tax-efficient, legal separation, limited liability protection, and various advantages you would receive.

These are the following drawbacks of being a limited company:

Increased Administrative Burden

Limited firms must comply with strict reporting standards than sole proprietorships or partnerships. This requires you to keep more thorough records and file more documentation.

Most Complicated Accounting

Limited corporations’ accounting standards are more complex than other business enterprises. As a result, you may need to engage an accountant to assist you with your taxes.

Less Privacy

Your company’s information, including its finances and directors, is publicly available. This means your competition and potential clients may see how well your own business or company performs.

Increased Shareholders Disputes

If your trader or limited company, or firm has shareholders, there is a chance that they will disagree. Resolving this can be costly and time-consuming.

Differences between sole traders and limited companies

A sole trader has unlimited liability, whereas a company’s shareholders have limited liability with less personal responsibility and monetary risk when forming a limited company.

Limited Company

Sole Trader

1.Limited companies have limited liability and must keep separate accounting records for their business and owners. Sole traders have unlimited liability. They are completely responsible for their business and finances.
2.It is a separate business entity in the eyes of the law.Sole traders are treated as one entity and are liable for the debts and obligations of their business.
3.This is the most tax-efficient way of operating the business as you are only liable to pay corporation tax of 25% with taxable profits above £250,000, and companies with taxable profits of £50,000 or less will pay 19% taxThe personal allowance is the money you may earn before paying income tax. The personal allowance for the tax year 2023/24 is £12,570. This implies that if you are a sole trader and your profit is less than £12,570, you will not be required to pay income tax.
4.Limited corporations must comply with additional compliance than single proprietors. Companies House requires them to produce yearly accounts, which are public records. They are also required to file company tax returns as per HMRC regulations.Sole traders must file annual tax returns with HMRC. These returns must include information on their business profits and any other income earned.
5.Limited liability is costly and time-consuming to set up as you need to deal with extra paperwork.Sole traders require little paperwork and are easy to set up. They need to keep a record of expenses and income to file tax returns.
6.Information about a company can be found on Companies House, which is the UK’s official register of companies.Sole traders have more privacy than limited companies. The financial records of a sole trader are not publicly available.
7.Easy access to finance because investors are more likely to invest in a limited company, as they know their investment is protected by limited liability.Raising funding for sole proprietors is challenging since banks and lenders favour limited corporations, thus, expansion options are limited.
8.Directors are classed as employees for National Insurance purposes, so, both the company and the director pay NI on their salaries and bonuses.For 2023/24, the Class 2 National Insurance (NI) rate is £3.45 per week. This implies that if you are self-employed and your profits are less than the lower profits limit (LPL) of £12,570, you must pay £3.45 per week in Class 2 NI contributions.

At what point should you become a limited company?

No one-size-fits-all solution exists since the optimal time to form a limited company depends on your business’s personal circumstances and business goals. However, there are certain general aspects of all limited companies to consider before making your limited company selection, such as:

If your firm is expanding and getting more complicated, a limited company structure may provide you with more security and flexibility.

As a sole proprietor, you are personally accountable for the debts and obligations of your firm. In the case of bankruptcy, a limited corporation can help to preserve your assets.

Limited firms are frequently perceived as more respectable than sole proprietorships or partnerships, making it simpler to obtain financing.

Limited businesses may benefit from lower tax rates than sole proprietorships or partnerships in specific instances.


A sole trader is an easier way to set up than a limited company. But running a company through a limited company has more advantages than the sole trader.

Before deciding on anything, you must consider all possible factors. The limited company name seems more professional to businesses, firms, clients, contractors, etc.

If you are unsure about personal finances and what to choose this tax year, consult an accountant and don’t rush into any decision.

Enquire for a no obligation quote

Click below to make an enquiry, or call us on 01908 041755.


Enquire for a no obligation quote

CloudCo Group is a Chartered Management Accountancy Firm offering premium accounting services to a range of businesses and individuals.

Recent Posts

Follow Us