Limited company or sole trader: The basics

limited company or sole trader

Limited company or sole trader: The basics

A big decision when starting a new business is whether you want to proceed as a limited company or sole trader. In the UK, 60% of businesses are sole traders, while 33% are companies. But just because registering as a sole trader is the most popular choice doesn’t mean it’ll be the best one for you.

Both options have advantages and disadvantages worth noting. But when you’re just starting out, it can be hard finding the right information for you. To make the process easier for you, we’ve put together some basic information you need to help make an informed choice.

What is a sole trader?

If you wanted to operate as a sole trader, there would be no separation between yourself and your business. You would run your business as an individual and be considered self-employed. After tax, you keep all the profits and are personally responsible for any losses.

To be a sole trader, you need to let HMRC know you’re self-employed, register for self-assessment as a sole trader, pick a business name, and keep accurate records of sales and expenses. 

At the start, this can be a tricky process, so don’t be afraid to look for outside help to guide you through your tax obligations.

What is a limited company?

Becoming a limited company creates a distinction between yourself and your business. You remain separate legal entities. You can be an owner and shareholder, rather than being the business itself. After registering your company, your business’s finances will be completely separate from your own.

Being a limited company has its own pitfalls so watch out for them. You’ll need to consider everything from insurance to PAYE. Again, there are places you can go for help to guide you through the first few months.

What are the advantages/disadvantages of each?

Depending on your circumstances, one option might be better than the other. Or it could come down to personal preference. Let’s break down the pros and cons:

Sole trader – advantages

  • A much easier start-up process.
  • Less admin – you only need to fill out a self-assessment form.
  • You get to keep all the profits.
  • It’s easy to change to a limited company if you choose to in the future.

Sole trader – disadvantages

  • There is no distinction between your business or personal finances. If things go wrong, you will be personally liable and could lose personal assets.
  • Once your income reaches a certain threshold, operating as a sole trader can be inefficient from a tax point of view. At this point, you could take more money home by transitioning to a limited company.
  • Banks and other businesses tend to be more wary of working with sole traders as opposed to limited companies.

Limited company – advantages

  • You’ll have limited liability, meaning your personal finances remain separate from the business’s. Should things go wrong, your personal assets will be safe.
  • More tax efficient. You could end up taking more money home.
  • It can be easier to grow your business when you’re a limited company.
  • Your business name will be protected.

Limited company – disadvantages

  • A much more complicated start-up process.
  • More regular admin to keep up with, including an annual return and annual accounts. This could use up valuable time if you do it yourself.
  • Less privacy as your business information will be readily available online to the public and competitors. 

Choosing to be a sole trader or limited company is a big decision that could have lasting effects on your business and how it operates. It’s also a decision that only you can make. After weighing up the pros and cons of each, it’s important you pick the best option for you and the longevity of your business.

But just because it’s your decision doesn’t mean other people can’t help. There are companies who can guide you through the rocky first months and plan a strategy for your future growth.

At Big Hand, we have the know-how to get your business off to the best start. We offer expert advice and can help you create a strategic plan that will get you exactly where you want to go. If you need help starting up your business or growing it further, get in touch on 0161 327 2911.

About the Author:

Since 2013, Sophie has been an integral part of the Big Hand team. As a social butterfly, Sophie is mostly responsible for introducing new clients to the company. If you’re an avid networking, you’re most likely to meet Sophie at local events. Alongside attracting new business, she also assists with account management, and she manages payroll on behalf of clients. For fun, Sophie loves to keep fit running or playing korfball with her team. She is also in the middle of learning a new language and so her most recent challenge is attempting to read Harry Potter in Dutch.