Sole Trader or Limited Company - How do I choose?

One of the most common questions I'm asked by those just setting up in business is 'should I be a sole trader or set up a limited company?'

The answer isn't a straight forward one and it does depend on your personal circumstances, the size of your business etc. However I've made a list below of the key things to consider when you're trying to decide.


Operating your business through a limited company means that as an individual you have limited liability. Should your company fail, as a shareholder you are not personally liable to pay off the companies debts. Your own personal losses are limited to any funds/loans you may have made to the company.

As a sole trader there is no distinction between you personally and the business. Therefore any debts of the business are also yours. Should your business fail, you are personally responsible to pay off any creditors etc. This means that your house, car and any other assets are at risk.

Setting up your business

Setting up business as a sole trader is easy. You must register with HMRC within three months of starting to trade.

To run your business through a limited company, you must first of all incorporate a new company at Companies House. You'll need to decide on and appoint company Directors and decide who will own the company by issuing shares. Both appointments need careful consideration and they have legal responsibilities. However if you're going to be a sole director/shareholder then this process is very simple.

You'll also need to register your company with HMRC and if you are going to pay yourself a salary as a director, you'll also have to set the company as an employer with HMRC.

Perception of customers and suppliers

It's a very common perception that limited companies carry more stature. I've come across quite a few clients that incorporated a company as their customers and suppliers would only deal with a limited company.

It's therefore very important to consider how customers and suppliers in your industry work. You'll want to ensure from the start that you can win new clients or customers so it's worth doing your homework.

Tax efficiencies

Operating as limited company can be more tax efficient. Profits made by a limited company can be withdrawn as dividends. Although tax is due on dividends drawn over a certain level, no national insurance is payable. However recent changes to the way in which dividends are taxed have meant that tax savings have been eroded, but savings can still be made.

Profits generated by a sole trader are subject to income tax as well as Class 4 NIC. In addition Class 2 NIC's are also due based on a set weekly amount.

The amount of tax savings available really depends on the profits being made by your business.

Accounting requirements

Each year a sole trader will need to prepare their year end profit and loss, a summary of receipts and expenses. It's obviously best to keep accounting records so your year end process will be relatively simply.

As a sole trader you're required to complete and file a Self Assessment Tax Return with HMRC by 31 January each year. Your trading profit for the year is entered into your self assessment tax return, along with details of any other income. The amount of tax you owe is then calculated. Your return is then filed and the appropriate payments of tax due are made by 31 January and 31 July each year.

The accounting requirements for a limited company are less straight forward and a number of different items have to be prepared and filed each year. These include;

- Preparation of statutory annual accounts, prepared in accordance with UK GAAP.

- Submission of statutory annual accounts to HMRC and abbreviated statutory accounts to Companies House

- Calculation and preparation of the company's corporation tax liability and corporation tax return.

- submission of corporation tax return to HMRC

- Payment of corporation tax nine months after the company's year end.

- preparation and submission of company's annual confirmation statement to Companies House.

- preparation and submission of directors self assessment tax returns by 31 January of each year.

- if directors are paid a salary as an employee, monthly PAYE RTI returns need to be filed each month with HMRC.

There are strict rules in place as to when all of the above items need to be filed and paid. Penalties and fines are in place which would need to be paid should any deadlines be missed.

Both sole traders and limited companies that exceed the VAT threshold would have to register for VAT and make quarterly returns to HMRC. (See our post on registering for VAT)

Which to choose?

As you can see there are a number of different factors that need to be considered when choosing between trading as a sole trader or limited company. Ultimately the decision is a personal one, there is no right or wrong answer, just consider carefully all the facts.

Also bear in mind that if you start trading as a sole trader, you can always incorporate as a limited company at a later date. This would need the help of an accountant to ensure that the transaction is accounted for correctly, especially for tax, but Zest would be very happy to quote & assist you with this.

Zest's cost effective packages designed for small businesses start from £35 (plus VAT) per month for sole traders and £75 (plus VAT) for limited companies.

Please note other business structures are available such as partnerships, limited liability partnerships, public limited companies (PLC). We have not covered these structures in our article.

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