Sole trader vs limited company
In this article
Whether you’re self-employed or building a new business, the type of business structure you choose can have a significant impact. The two most common are becoming a sole trader or setting up a limited company.
It’s important to choose carefully, so we’ve created a complete guide to help you decide which is ideal for your business, along with the key differences between the two and each one’s pros and cons.
What are the differences between a sole trader and a limited company?
Choosing between sole trader vs limited company structures can affect everything from how much tax you pay to the types of accidents or damages you could be liable for.
Sole traders
As the name suggests, a sole trader is a self-employed individual, the only owner of the business and completely responsible for it. The owner and the business are classed as one entity.
The benefits of being a sole trader include minimal paperwork and only needing to pay income tax and National Insurance on your profits via a self-assessment tax return. Sole trader businesses are also simple to set up, so you can start trading as soon as you have all the required insurances or licences. They’re also generally easier to run.
However, because the business is only allowed one legal owner, if the worst should happen, you, as the owner, could lose your savings and/or personal assets and be forced to declare bankruptcy.
If you would like more information on being self-employed, see our top tips guide to self-employment.
Limited companies
Limited companies are legally separate entities from their owners, which reduces liability but does make them slightly more complex to run.
Choosing a limited company over being a sole trader can come with some helpful tax benefits, including being able to keep profits within the business and pay small salaries with high dividends to reduce your tax bill. However, the main benefit of a limited company is that if a limited company goes bust, the owner's personal assets are not affected. As long as you can prove you have run the company legally and with correct practices, you cannot be pursued for any debts the company has accumulated.
While the financial benefits are substantial, running a limited company isn’t for everyone – there are greater administration and regulation requirements associated, and you will need to pay fees with Companies House and keep detailed records.
Choosing between sole trader vs limited company structure
If you’re deciding on which type of business structure you should go for, we’ve compared the two below. Don’t forget to check out our detailed guides on how to choose the right business structure and small business tax if you would like more insights.
|
Sole trader |
Limited company |
|
|
Ownership |
One owner |
Multiple directors or shareholders possible |
|
Liability |
Unlimited liability - the owner is personally liable for any debts accrued by the business |
The business and the owner(s) are separate legal entities with limited liability |
|
Finances |
The owner keeps all the profits after paying tax |
The business retains profits after paying tax, and directors must follow certain rules when taking money out of a limited company, such as for salaries or a director’s loan |
|
Registering |
You can start trading straight away without registering, but you must register as a sole trader if you earn more than £1,000 in a tax year |
You must incorporate with Companies House to begin trading as a limited company |
|
Employees |
Sole traders can hire employees |
Limited companies can hire employees |
|
Income tax |
Sole traders may need to pay income tax, depending on their profits |
Directors may need to pay income tax, depending on how they take money out of the limited company |
|
National Insurance |
Sole traders may need to pay National Insurance, depending on their profits, and may choose to pay anyway to access certain benefits and State Pension |
Directors may need to pay National Insurance, depending on how they take money out of the limited company |
|
VAT |
Sole traders must pay VAT if their total taxable turnover exceeds £90,000 in one year |
Limited companies must pay VAT if their total taxable turnover exceeds £90,000 in one year |
|
Corporation tax |
Sole traders don’t pay corporation tax |
Limited companies pay corporation tax on any profits |
How to change from a sole trader to a limited company
As your business grows, you may be tempted to switch from being a sole trader to a limited company. If you choose to do this, there are important things you should consider.
- You may need to substitute existing contracts to transfer obligations from a sole trader to a limited company
- You will need to set up business bank accounts.
- Your insurance policies will need reviewing as your new limited company may have different risk profiles and coverage requirements.
- Your old sole trader business will need to be deregistered
- The new company will need to register for corporation tax, potentially VAT, and PAYE if paying salaries above the threshold. The corporation tax registration must occur within three months of starting the business, or your business could face penalties for late registration.
Once you have your new business setup, you may turn to other things such as changing its official name – limited companies have more restrictions on what they can be named than sole traders. Check out our guide on how to change the name of your business for more information.
Updating your Which? account
Any Which? Trusted Trader that changes its business structure will need to sign a new agreement with us. You would also need to share your accounts with Which? after six months of trading activity.
If you change your business name, we recommend stating the name you were formerly trading under on your Which? Trusted Trader profile page, so consumers can see any change of legal entity.
If you are not a previous Which? Trusted Trader, registering your business with us comes with countless benefits. You will receive a dedicated account manager to offer advice and support, a wellness and legal helpline, and due to our rigorous assessment process, customers are confident in businesses with a Which? logo. Join the scheme and see how your business can benefit.
