Sole Trader or Limited Company?

Should I set up as a sole trader or limited company?

We look at the key differences between running as a sole trader or limited company

When you first set up in business you need to decide whether to be a Sole Trader (self employed) or to set up a limited company.

Here are the main points to consider.

SOLE TRADER

1. Simple to set up with few legal requirements, the main one being to register with HMRC
2. No separation between you and the business, so you keep what you earn and pay tax on your profits. No need for complications like PAYE and dividends
3. Sole traders submit information to HMRC on their self-assessment tax return. Tax is paid in January following the year-end, and if the tax bill is more than £1,000 a payment on account is due in January and July
4. Many sole traders don’t need to prepare business accounts
5. Sole traders can employ staff and be VAT registered the same as any other business
6. Tax can be more expensive, particularly if you don’t spend all the money you earn. This is mainly because of National Insurance which companies don’t pay
7. Because there’s no separation between you and the business, your personal assets are at risk if the business gets into difficulties
8. Two or more sole traders can work in business as a partnership. With a partnership you will each be liable for the others’ business debts if there are problems. The business will also need to submit a partnership tax return to HMRC.

LIMITED COMPANY

1. A company is a legal entity that is separate from its owner(s) – the shareholder(s)
2. Because a company is a legal entity it is more complicated to set up. It needs to have at least one shareholder and one director – they can be the same person
3. The main reason for having a company is limited liability. This means that a company’s debts belong to the company and not its owners, unless a debt has been personally underwritten by the owners
4. Company tax is often lower than self-employed tax. Company directors who are also shareholders have more flexibility as to how they pay themselves
5. Having a limited company can give the impression of a more established and stable business
6. A company needs to submit documents annually to Companies House
   • A set of accounts
   • A compliance statement
7. Every company has a Company Number allocated to it. It must also have an official address known as a Registered Office. This must be displayed at the address, and recorded on official documents along with the registration number
8. Details of the company directors, shareholders and finances are on public record at Companies House
9. Companies pay corporation tax annually, 9 months after the year-end, unless they have profits in excess of £1.5m in which case they pay by instalments

Setting up your own business? Check out the rest of our Business Fundamentals series here.