Sole Trader or Limited Company?

By Catherine Pope

June 19, 2019

It’s surprisingly easy to set up a limited company. When I registered my business around 7 years ago, I was astonished to see all the paperwork in my inbox about 15 minutes later. The fact that it’s so quick and easy means that sometimes people create companies without really considering what’s right for them. In this post, I’ll outline the differences between operating as a limited company and sole trader, explaining the advantages and disadvantages of both.

Sole trader

Most freelancers start off as a sole trader. You simply notify the Inland Revenue that you are now self-employed, and you’re ready to go. The accounting requirements are very straightforward: you’re taxed on profits through your annual self-assessment return. Your profit is income minus allowable expenses. ‘Allowable’ means those expenses have to be purely for business purposes. So you can’t claim for cat grooming or biscuits.

If your tax bill is greater than £1,000, you have to make payments on account by the 31st of July each year. This means you make two tax payments –  one in advance, one in arrears.

There is no legal difference between you and your business, and you are liable for any business debts. Although it’s not advisable, you could use the same bank account for your business and personal transactions. There’s no need to report your individual transactions, only your income, expenses, and profit. It is good practice, though, to record all your business transactions – income and outgoings – and to save relevant receipts.

Limited company

A limited company exists completely separately from you. You transact business as a corporation rather than as an individual. The main advantage is that your personal assets are protected. If your company is declared bankrupt, your personal assets cannot be taken to cover any liabilities.

As you can see, this offers significant protection for you. However, it also comes with significant responsibilities. You have to operate your company within the law. This includes:

  • Maintaining a separate business bank account
  • Recording every transaction
  • Filing annual returns and accounts with Companies House each year
  • Notifying Companies House of any major changes to your business
  • Paying all relevant taxes

When you create a limited company, you become a shareholder and a director of a company. Any company profits are currently taxed at 19% through corporation tax. You have to report this on a CT600 form at the end of your financial year. As a director, you can pay yourself a salary, which counts as a business expense and is therefore tax-deductible. You can then pay yourself dividends from the profits. These dividends, along with your salary, must be reported through your personal tax self-assessment form and any tax liabilities paid.

Company directors can’t just dip into the business bank account. You can only withdraw money as salary, dividends, or a director’s loan – all of which have tax implications and must be reported. 

Advantages of being a sole trader

  • There’s much less paperwork. You’re not legally obliged to file anything other than your annual personal tax self-assessment return.
  • Your accounts are much simpler. As I mentioned earlier, you need only report your income, expenses, and profit. There’s no need to break them down.
  • It’s cheaper. Although the costs of setting up a limited company are modest, you’ll almost certainly need to hire an accountant to help you with the annual accounts and returns. This usually costs a minimum of £500.
  • You can protect your privacy. As a company director, your name, age, and address are a matter of public record. Your company accounts are also available for anyone to view.

Advantages of being a limited company

  • You can generally claim a wider range of business expenses. It’s a good idea to hire an accountant to explain exactly what’s allowable in your circumstances.
  • Limited companies are often more tax efficient. Again, you’d need an accountant to advise on the best payment structure for you.
  • You can borrow money as a company. This could be useful if you have a poor personal credit rating but need additional funds to grow your business.
  • Some large corporations prefer dealing with limited companies. If you have big clients, they might feel safer dealing with you as a company rather than as a sole trader. The fact that your business is carefully scrutinized lends you credibility.

Whichever route you take, you need to be careful of the IR35 rules. These are designed to prevent permanent employees from disguising themselves as self-employed or limited companies to take advantage of the tax benefits. You are vulnerable to an IR35 investigation if you have only one client, especially if you are based at their premises. You can check your employment status on the HMRC website.


In short, a limited company gives you more protection but involves more responsibility. As a sole trader, you can enjoy lower costs and greater flexibility, but you cannot operate separately from your business. It’s especially important to ensure you have appropriate insurance cover for your business. You can change your business status at any time, although it’s much easier to go from sole trader to limited company than the other way around. Think carefully before creating a limited company, even though it’s seductively quick and easy to do.

This post is for information only and does not constitute advice.

Image © Andrey Popov –

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